Financial Statements - Microsoft Corporation (MSFT) - All Years

Years: 2018, 2019, 2020, 2021, 2022

YEAR 2022

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INCOME STATEMENTS

(In millions, except per share amounts)


Year Ended June 30,	2022		2021		2020

Revenue:
Product	$	72,732	$	71,074	$	68,041
Service and other		125,538		97,014		74,974


Total revenue		198,270		168,088		143,015


Cost of revenue:
Product		19,064		18,219		16,017
Service and other		43,586		34,013		30,061


Total cost of revenue		62,650		52,232		46,078


Gross margin		135,620		115,856		96,937
Research and development		24,512		20,716		19,269
Sales and marketing		21,825		20,117		19,598
General and administrative		5,900		5,107		5,111


Operating income		83,383		69,916		52,959
Other income, net		333		1,186		77


Income before income taxes		83,716		71,102		53,036
Provision for income taxes		10,978		9,831		8,755


Net income	$	72,738	$	61,271	$	44,281


Earnings per share:
Basic	$	9.70	$	8.12	$	5.82
Diluted	$	9.65	$	8.05	$	5.76

Weighted average shares outstanding:
Basic		7,496		7,547		7,610
Diluted		7,540		7,608		7,683

Refer to accompanying notes.

PART II

Item 8

COMPREHENSIVE INCOME STATEMENTS

(In millions)


Year Ended June 30,	2022			2021			2020

Net income	$	72,738		$	61,271		$	44,281


Other comprehensive income (loss), net of tax:
Net change related to derivatives		6			19			(38	)
Net change related to investments		(5,360	)		(2,266	)		3,990
Translation adjustments and other		(1,146	)		873			(426	)


Other comprehensive income (loss)		(6,500	)		(1,374	)		3,526


Comprehensive income	$	66,238		$	59,897		$	47,807

Refer to accompanying notes.

PART II

Item 8

BALANCE SHEETS

(In millions)


June 30,	2022			2021

Assets
Current assets:
Cash and cash equivalents	$	13,931		$	14,224
Short-term investments		90,826			116,110


Total cash, cash equivalents, and short-term investments		104,757			130,334
Accounts receivable, net of allowance for doubtful accounts of $633 and $751		44,261			38,043
Inventories		3,742			2,636
Other current assets		16,924			13,393


Total current assets		169,684			184,406
Property and equipment, net of accumulated depreciation of $59,660 and $51,351		74,398			59,715
Operating lease right-of-use assets		13,148			11,088
Equity investments		6,891			5,984
Goodwill		67,524			49,711
Intangible assets, net		11,298			7,800
Other long-term assets		21,897			15,075


Total assets	$	364,840		$	333,779


Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	19,000		$	15,163
Current portion of long-term debt		2,749			8,072
Accrued compensation		10,661			10,057
Short-term income taxes		4,067			2,174
Short-term unearned revenue		45,538			41,525
Other current liabilities		13,067			11,666


Total current liabilities		95,082			88,657
Long-term debt		47,032			50,074
Long-term income taxes		26,069			27,190
Long-term unearned revenue		2,870			2,616
Deferred income taxes		230			198
Operating lease liabilities		11,489			9,629
Other long-term liabilities		15,526			13,427


Total liabilities		198,298			191,791


Commitments and contingencies
Stockholders’ equity:
Common stock and paid-in capital – shares authorized 24,000; outstanding 7,464 and 7,519		86,939			83,111
Retained earnings		84,281			57,055
Accumulated other comprehensive income (loss)		(4,678	)		1,822


Total stockholders’ equity		166,542			141,988


Total liabilities and stockholders’ equity	$	364,840		$	333,779

Refer to accompanying notes.

PART II

Item 8

CASH FLOWS STATEMENTS

(In millions)


Year Ended June 30,	2022			2021			2020

Operations
Net income	$	72,738		$	61,271		$	44,281
Adjustments to reconcile net income to net cash from operations:
Depreciation, amortization, and other		14,460			11,686			12,796
Stock-based compensation expense		7,502			6,118			5,289
Net recognized gains on investments and derivatives		(409	)		(1,249	)		(219	)
Deferred income taxes		(5,702	)		(150	)		11
Changes in operating assets and liabilities:
Accounts receivable		(6,834	)		(6,481	)		(2,577	)
Inventories		(1,123	)		(737	)		168
Other current assets		(709	)		(932	)		(2,330	)
Other long-term assets		(2,805	)		(3,459	)		(1,037	)
Accounts payable		2,943			2,798			3,018
Unearned revenue		5,109			4,633			2,212
Income taxes		696			(2,309	)		(3,631	)
Other current liabilities		2,344			4,149			1,346
Other long-term liabilities		825			1,402			1,348


Net cash from operations		89,035			76,740			60,675


Financing
Cash premium on debt exchange		0			(1,754	)		(3,417	)
Repayments of debt		(9,023	)		(3,750	)		(5,518	)
Common stock issued		1,841			1,693			1,343
Common stock repurchased		(32,696	)		(27,385	)		(22,968	)
Common stock cash dividends paid		(18,135	)		(16,521	)		(15,137	)
Other, net		(863	)		(769	)		(334	)


Net cash used in financing		(58,876	)		(48,486	)		(46,031	)


Investing
Additions to property and equipment		(23,886	)		(20,622	)		(15,441	)
Acquisition of companies, net of cash acquired, and purchases of intangible and other assets		(22,038	)		(8,909	)		(2,521	)
Purchases of investments		(26,456	)		(62,924	)		(77,190	)
Maturities of investments		16,451			51,792			66,449
Sales of investments		28,443			14,008			17,721
Other, net		(2,825	)		(922	)		(1,241	)


Net cash used in investing		(30,311	)		(27,577	)		(12,223	)


Effect of foreign exchange rates on cash and cash equivalents		(141	)		(29	)		(201	)


Net change in cash and cash equivalents		(293	)		648			2,220
Cash and cash equivalents, beginning of period		14,224			13,576			11,356


Cash and cash equivalents, end of period	$	13,931		$	14,224		$	13,576

Refer to accompanying notes.

PART II

Item 8

STOCKHOLDERS’ EQUITY STATEMENTS

(In millions, except per share amounts)


Year Ended June 30,	2022			2021			2020

Common stock and paid-in capital

Balance, beginning of period	$	83,111		$	80,552		$	78,520
Common stock issued		1,841			1,963			1,343
Common stock repurchased		(5,688	)		(5,539	)		(4,599	)
Stock-based compensation expense		7,502			6,118			5,289
Other, net		173			17			(1	)


Balance, end of period		86,939			83,111			80,552


Retained earnings

Balance, beginning of period		57,055			34,566			24,150
Net income		72,738			61,271			44,281
Common stock cash dividends		(18,552	)		(16,871	)		(15,483	)
Common stock repurchased		(26,960	)		(21,879	)		(18,382	)
Cumulative effect of accounting changes		0			(32	)		0


Balance, end of period		84,281			57,055			34,566


Accumulated other comprehensive income (loss)

Balance, beginning of period		1,822			3,186			(340	)
Other comprehensive income (loss)		(6,500	)		(1,374	)		3,526
Cumulative effect of accounting changes		0			10			0


Balance, end of period		(4,678	)		1,822			3,186


Total stockholders’ equity	$	166,542		$	141,988		$	118,304


Cash dividends declared per common share	$	2.48		$	2.24		$	2.04

Refer to accompanying notes.

PART II

Item 8

NOTES TO FINANCIAL STATEMENTS

NOTE 1 — ACCOUNTING POLICIES

Accounting Principles

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

We have recast certain prior period amounts to conform to the current period presentation. The recast of these prior period amounts had no impact on our consolidated balance sheets, consolidated income statements, or consolidated cash flows statements.

Principles of Consolidation

The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated.

Estimates and Assumptions

Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples of estimates and assumptions include: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price (“SSP”) of performance obligations, variable consideration, and other obligations such as product returns and refunds; loss contingencies; product warranties; the fair value of and/or potential impairment of goodwill and intangible assets for our reporting units; product life cycles; useful lives of our tangible and intangible assets; allowances for doubtful accounts; the market value of, and demand for, our inventory; stock-based compensation forfeiture rates; when technological feasibility is achieved for our products; the potential outcome of uncertain tax positions that have been recognized in our consolidated financial statements or tax returns; and determining the timing and amount of impairments for investments. Actual results and outcomes may differ from management’s estimates and assumptions due to risks and uncertainties.

In July 2022, we completed an assessment of the useful lives of our server and network equipment. Due to investments in software that increased efficiencies in how we operate our server and network equipment, as well as advances in technology, we determined we should increase the estimated useful lives of both server and network equipment from four years to six years. This change in accounting estimate will be effective beginning fiscal year 2023. We had previously increased the estimated useful lives of both server and network equipment in July 2020.

Foreign Currencies

Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are recorded to other comprehensive income.

Revenue

Product Revenue and Service and Other Revenue

Product revenue includes sales from operating systems, cross-device productivity applications, server applications, business solution applications, desktop and server management tools, software development tools, video games, and hardware such as PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories.

Service and other revenue includes sales from cloud-based solutions that provide customers with software, services, platforms, and content such as Office 365, Azure, Dynamics 365, and Xbox; solution support; and consulting services. Service and other revenue also includes sales from online advertising and LinkedIn.

PART II

Item 8

Revenue Recognition

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.

Nature of Products and Services

Licenses for on-premises software provide the customer with a right to use the software as it exists when made available to the customer. Customers may purchase perpetual licenses or subscribe to licenses, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. In cases where we allocate revenue to software updates, primarily because the updates are provided at no additional charge, revenue is recognized as the updates are provided, which is generally ratably over the estimated life of the related device or license.

Certain volume licensing programs, including Enterprise Agreements, include on-premises licenses combined with Software Assurance (“SA”). SA conveys rights to new software and upgrades released over the contract period and provides support, tools, and training to help customers deploy and use products more efficiently. On-premises licenses are considered distinct performance obligations when sold with SA. Revenue allocated to SA is generally recognized ratably over the contract period as customers simultaneously consume and receive benefits, given that SA comprises distinct performance obligations that are satisfied over time.

Cloud services, which allow customers to use hosted software over the contract period without taking possession of the software, are provided on either a subscription or consumption basis. Revenue related to cloud services provided on a subscription basis is recognized ratably over the contract period. Revenue related to cloud services provided on a consumption basis, such as the amount of storage used in a period, is recognized based on the customer utilization of such resources. When cloud services require a significant level of integration and interdependency with software and the individual components are not considered distinct, all revenue is recognized over the period in which the cloud services are provided.

Revenue from search advertising is recognized when the advertisement appears in the search results or when the action necessary to earn the revenue has been completed. Revenue from consulting services is recognized as services are provided.

Our hardware is generally highly dependent on, and interrelated with, the underlying operating system and cannot function without the operating system. In these cases, the hardware and software license are accounted for as a single performance obligation and revenue is recognized at the point in time when ownership is transferred to resellers or directly to end customers through retail stores and online marketplaces.

Refer to Note 19 – Segment Information and Geographic Data for further information, including revenue by significant product and service offering.

Significant Judgments

Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. When a cloud-based service includes both on-premises software licenses and cloud services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the cloud service and recognized over time. Certain cloud services, primarily Office 365, depend on a significant level of integration, interdependency, and interrelation between the desktop applications and cloud services, and are accounted for together as one performance obligation. Revenue from Office 365 is recognized ratably over the period in which the cloud services are provided.

PART II

Item 8

Judgment is required to determine the SSP for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately, including on-premises licenses sold with SA or software updates provided at no additional charge. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services.

In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining the SSP.

Due to the various benefits from and the nature of our SA program, judgment is required to assess the pattern of delivery, including the exercise pattern of certain benefits across our portfolio of customers.

Our products are generally sold with a right of return, we may provide other credits or incentives, and in certain instances we estimate customer usage of our products and services, which are accounted for as variable consideration when determining the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period if additional information becomes available. Changes to our estimated variable consideration were not material for the periods presented.

Contract Balances and Other Receivables

Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. We record a receivable related to revenue recognized for multi-year on-premises licenses as we have an unconditional right to invoice and receive payment in the future related to those licenses.

Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include SA and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for consulting services to be performed in the future, LinkedIn subscriptions, Office 365 subscriptions, Xbox subscriptions, Windows post-delivery support, Dynamics business solutions, and other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service.

Refer to Note 13 – Unearned Revenue for further information, including unearned revenue by segment and changes in unearned revenue during the period.

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing. Examples include invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period, and multi-year on-premises licenses that are invoiced annually with revenue recognized upfront.

As of June 30, 2022 and 2021, other receivables due from suppliers were $1.0 billion and $965 million, respectively, and are included in accounts receivable, net in our consolidated balance sheets.

As of June 30, 2022 and 2021, long-term accounts receivable, net of allowance for doubtful accounts, was $3.8 billion and $3.4 billion, respectively, and is included in other long-term assets in our consolidated balance sheets.

The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence.

PART II

Item 8

Activity in the allowance for doubtful accounts was as follows:

(In millions)


Year Ended June 30,		2022			2021			2020

Balance, beginning of period	$	798		$	816		$	434
Charged to costs and other		157			234			560
Write-offs		(245	)		(252	)		(178	)


Balance, end of period	$	710		$	798		$	816

Allowance for doubtful accounts included in our consolidated balance sheets:

(In millions)


June 30,		2022		2021		2020

Accounts receivable, net of allowance for doubtful accounts	$	633	$	751	$	788
Other long-term assets		77		47		28


Total	$	710	$	798	$	816

We record financing receivables when we offer certain of our customers the option to acquire our software products and services offerings through a financing program in a limited number of countries. As of June 30, 2022 and 2021, our financing receivables, net were $4.1 billion and $4.4 billion, respectively, for short-term and long-term financing receivables, which are included in other current assets and other long-term assets in our consolidated balance sheets. We record an allowance to cover expected losses based on troubled accounts, historical experience, and other currently available evidence.

Assets Recognized from Costs to Obtain a Contract with a Customer

We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in other current and long-term assets in our consolidated balance sheets.

We apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include our internal sales force compensation program and certain partner sales incentive programs as we have determined annual compensation is commensurate with annual sales activities.

Cost of Revenue

Cost of revenue includes: manufacturing and distribution costs for products sold and programs licensed; operating costs related to product support service centers and product distribution centers; costs incurred to include software on PCs sold by original equipment manufacturers (“OEM”), to drive traffic to our websites, and to acquire online advertising space; costs incurred to support and maintain online products and services, including datacenter costs and royalties; warranty costs; inventory valuation adjustments; costs associated with the delivery of consulting services; and the amortization of capitalized software development costs. Capitalized software development costs are amortized over the estimated lives of the products.

Product Warranty

We provide for the estimated costs of fulfilling our obligations under hardware and software warranties at the time the related revenue is recognized. For hardware warranties, we estimate the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The specific hardware warranty terms and conditions vary depending upon the product sold and the country in which we do business, but generally include parts and labor over a period generally ranging from 90 days to three years. For software warranties, we estimate the costs to provide bug fixes, such as security patches, over the estimated life of the software. We regularly reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.

PART II

Item 8

Research and Development

Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, localization costs incurred to translate software for international markets, and the amortization of purchased software code and services content. Such costs related to software development are included in research and development expense until the point that technological feasibility is reached, which for our software products, is generally shortly before the products are released to production. Once technological feasibility is reached, such costs are capitalized and amortized to cost of revenue over the estimated lives of the products.

Sales and Marketing

Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel, and the costs of advertising, promotions, trade shows, seminars, and other programs. Advertising costs are expensed as incurred. Advertising expense was $1.5 billion, $1.5 billion, and $1.6 billion in fiscal years 2022, 2021, and 2020, respectively.

Stock-Based Compensation

Compensation cost for stock awards, which include restricted stock units (“RSUs”) and performance stock units (“PSUs”), is measured at the fair value on the grant date and recognized as expense, net of estimated forfeitures, over the related service or performance period. The fair value of stock awards is based on the quoted price of our common stock on the grant date less the present value of expected dividends not received during the vesting period. We measure the fair value of PSUs using a Monte Carlo valuation model. Compensation cost for RSUs is recognized using the straight-line method and for PSUs is recognized using the accelerated method.

Compensation expense for the employee stock purchase plan (“ESPP”) is measured as the discount the employee is entitled to upon purchase and is recognized in the period of purchase.

Income Taxes

Income tax expense includes U.S. and international income taxes, and interest and penalties on uncertain tax positions. Certain income and expenses are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. Deferred tax assets are reported net of a valuation allowance when it is more likely than not that a tax benefit will not be realized. All deferred income taxes are classified as long-term in our consolidated balance sheets.

Financial Instruments

Investments

We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations.

PART II

Item 8

Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding credit losses and impairments, are recorded in other comprehensive income. Fair value is calculated based on publicly available market information or other estimates determined by management. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. To determine credit losses, we employ a systematic methodology that considers available quantitative and qualitative evidence. In addition, we consider specific adverse conditions related to the financial health of, and business outlook for, the investee. If we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge in other income (expense), net and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, we may incur future impairments.

Equity investments with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). We perform a qualitative assessment on a periodic basis and recognize an impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in value are recorded in other income (expense), net.

Derivatives

Derivative instruments are recognized as either assets or liabilities and measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.

For derivative instruments designated as fair value hedges, gains and losses are recognized in other income (expense), net with offsetting gains and losses on the hedged items. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net.

For derivative instruments designated as cash flow hedges, gains and losses are initially reported as a component of other comprehensive income and subsequently recognized in other income (expense), net with the corresponding hedged item. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net.

For derivative instruments that are not designated as hedges, gains and losses from changes in fair values are primarily recognized in other income (expense), net.

Fair Value Measurements

We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

•

Level 1 – inputs are based upon unadjusted quoted prices for identical instruments in active markets. Our Level 1 investments include U.S. government securities, common and preferred stock, and mutual funds. Our Level 1 derivative assets and liabilities include those actively traded on exchanges.

•

Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies. Our Level 2 investments include commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Our Level 2 derivative assets and liabilities include certain over-the-counter forward, option, and swap contracts.

PART II

Item 8

•

Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 assets and liabilities include investments in corporate notes and bonds, municipal securities, and goodwill and intangible assets, when they are recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities.

We measure equity investments without readily determinable fair values on a nonrecurring basis. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections.

Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.

Inventories

Inventories are stated at average cost, subject to the lower of cost or net realizable value. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. Net realizable value is the estimated selling price less estimated costs of completion, disposal, and transportation. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of revenue.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation, and depreciated using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. The estimated useful lives of our property and equipment are generally as follows: computer software developed or acquired for internal use, three to seven years; computer equipment, two to four years; buildings and improvements, five to 15 years; leasehold improvements, three to 20 years; and furniture and equipment, one to 10 years. Land is not depreciated.

Leases

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities.

Goodwill

Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (May 1 for us) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.

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Intangible Assets

Our intangible assets are subject to amortization and are amortized using the straight-line method over their estimated period of benefit, ranging from one to 20 years. We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.

Recent Accounting Guidance

Accounting for Income Taxes

In December 2019, the Financial Accounting Standards Board issued a new standard to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. We adopted the standard effective July 1, 2021. Adoption of the standard did not have a material impact on our consolidated financial statements.

NOTE 2 — EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.

The components of basic and diluted EPS were as follows:

(In millions, except earnings per share)


Year Ended June 30,	2022		2021		2020

Net income available for common shareholders (A)	$	72,738	$	61,271	$	44,281
Weighted average outstanding shares of common stock (B)		7,496		7,547		7,610
Dilutive effect of stock-based awards		44		61		73


Common stock and common stock equivalents (C)		7,540		7,608		7,683


Earnings Per Share

Basic (A/B)	$	9.70	$	8.12	$	5.82
Diluted (A/C)	$	9.65	$	8.05	$	5.76

Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.

NOTE 3 — OTHER INCOME (EXPENSE), NET

The components of other income (expense), net were as follows:

(In millions)


Year Ended June 30,	2022			2021			2020

Interest and dividends income	$	2,094		$	2,131		$	2,680
Interest expense		(2,063	)		(2,346	)		(2,591	)
Net recognized gains on investments		461			1,232			32
Net gains (losses) on derivatives		(52	)		17			187
Net gains (losses) on foreign currency remeasurements		(75	)		54			(191	)
Other, net		(32	)		98			(40	)


Total	$	333		$	1,186		$	77

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Net Recognized Gains (Losses) on Investments

Net recognized gains (losses) on debt investments were as follows:

(In millions)


Year Ended June 30,	2022			2021			2020

Realized gains from sales of available-for-sale securities	$	162		$	105		$	50
Realized losses from sales of available-for-sale securities		(138	)		(40	)		(37	)
Impairments and allowance for credit losses		(81	)		(2	)		(17	)


Total	$	(57	)	$	63		$	(4	)

Net recognized gains (losses) on equity investments were as follows:

(In millions)


Year Ended June 30,	2022			2021			2020

Net realized gains on investments sold	$	29		$	123		$	83
Net unrealized gains on investments still held		509			1,057			69
Impairments of investments		(20	)		(11	)		(116	)


Total	$	518		$	1,169		$	36

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NOTE 4 — INVESTMENTS

Investment Components

The components of investments were as follows:

(In millions)	Fair Value Level		Adjusted Cost Basis		Unrealized Gains		Unrealized Losses			Recorded Basis		Cash and Cash Equivalents		Short-term Investments		Equity Investments


June 30, 2022

Changes in Fair Value Recorded in Other Comprehensive Income

Commercial paper		Level 2	$	2,500	$	0	$	0		$	2,500	$	2,498	$	2	$	0
Certificates of deposit		Level 2		2,071		0		0			2,071		2,032		39		0
U.S. government securities		Level 1		79,696		29		(2,178	)		77,547		9		77,538		0
U.S. agency securities		Level 2		419		0		(9	)		410		0		410		0
Foreign government bonds		Level 2		506		0		(24	)		482		0		482		0
Mortgage- and asset-backed securities		Level 2		727		1		(30	)		698		0		698		0
Corporate notes and bonds		Level 2		11,661		4		(554	)		11,111		0		11,111		0
Corporate notes and bonds		Level 3		67		0		0			67		0		67		0
Municipal securities		Level 2		368		19		(13	)		374		0		374		0
Municipal securities		Level 3		103		0		(6	)		97		0		97		0


Total debt investments			$	98,118	$	53	$	(2,814	)	$	95,357	$	4,539	$	90,818	$	0


Changes in Fair Value Recorded in Net Income

Equity investments		Level 1								$	1,590	$	1,134	$	0	$	456
Equity investments		Other									6,435		0		0		6,435


Total equity investments										$	8,025	$	1,134	$	0	$	6,891


Cash										$	8,258	$	8,258	$	0	$	0
Derivatives, net^(a)											8		0		8		0


Total										$	111,648	$	13,931	$	90,826	$	6,891

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(In millions)	Fair Value Level		Adjusted Cost Basis		Unrealized Gains		Unrealized Losses			Recorded Basis		Cash and Cash Equivalents		Short-term Investments		Equity Investments


June 30, 2021

Changes in Fair Value Recorded in Other Comprehensive Income

Commercial paper		Level 2	$	4,316	$	0	$	0		$	4,316	$	1,331	$	2,985	$	0
Certificates of deposit		Level 2		3,615		0		0			3,615		2,920		695		0
U.S. government securities		Level 1		90,664		3,832		(111	)		94,385		1,500		92,885		0
U.S. agency securities		Level 2		807		2		0			809		0		809		0
Foreign government bonds		Level 2		6,213		9		(2	)		6,220		225		5,995		0
Mortgage- and asset-backed securities		Level 2		3,442		22		(6	)		3,458		0		3,458		0
Corporate notes and bonds		Level 2		8,443		249		(9	)		8,683		0		8,683		0
Corporate notes and bonds		Level 3		63		0		0			63		0		63		0
Municipal securities		Level 2		308		63		0			371		0		371		0
Municipal securities		Level 3		95		0		(7	)		88		0		88		0


Total debt investments			$	117,966	$	4,177	$	(135	)	$	122,008	$	5,976	$	116,032	$	0


Changes in Fair Value Recorded in Net Income

Equity investments		Level 1								$	1,582	$	976	$	0	$	606
Equity investments		Other									5,378		0		0		5,378


Total equity investments										$	6,960	$	976	$	0	$	5,984


Cash										$	7,272	$	7,272	$	0	$	0
Derivatives, net^(a)											78		0		78		0


Total										$	136,318	$	14,224	$	116,110	$	5,984

(a)	Refer to Note 5 – Derivatives for further information on the fair value of our derivative instruments.

Equity investments presented as “Other” in the tables above include investments without readily determinable fair values measured using the equity method or measured at cost with adjustments for observable changes in price or impairments, and investments measured at fair value using net asset value as a practical expedient which are not categorized in the fair value hierarchy. As of June 30, 2022 and 2021, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $3.8 billion and $3.3 billion, respectively.

Unrealized Losses on Debt Investments

Debt investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows:

	Less than 12 Months					12 Months or Greater							Total Unrealized Losses


(In millions)	Fair Value			Unrealized Losses		Fair Value		Unrealized Losses			Total Fair Value


June 30, 2022

U.S. government and agency securities	$	59,092	$	(1,835	)	$	2,210	$	(352	)	$	61,302	$	(2,187	)
Foreign government bonds		418		(18	)		27		(6	)		445		(24	)
Mortgage- and asset-backed securities		510		(26	)		41		(4	)		551		(30	)
Corporate notes and bonds		9,443		(477	)		786		(77	)		10,229		(554	)
Municipal securities		178		(12	)		74		(7	)		252		(19	)


Total	$	69,641	$	(2,368	)	$	3,138	$	(446	)	$	72,779	$	(2,814	)

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	Less than 12 Months					12 Months or Greater								Total Unrealized Losses


(In millions)		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Total Fair Value


June 30, 2021

U.S. government and agency securities	$	5,294	$	(111	)	$	0	$	0		$	5,294	$	(111	)
Foreign government bonds		3,148		(1	)		5		(1	)		3,153		(2	)
Mortgage- and asset-backed securities		1,211		(5	)		87		(1	)		1,298		(6	)
Corporate notes and bonds		1,678		(8	)		34		(1	)		1,712		(9	)
Municipal securities		58		(7	)		1		0			59		(7	)


Total	$	11,389	$	(132	)	$	127	$	(3	)	$	11,516	$	(135	)

Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Management does not believe any remaining unrealized losses represent impairments based on our evaluation of available evidence.

Debt Investment Maturities

(In millions)	Adjusted Cost Basis		Estimated Fair Value


June 30, 2022

Due in one year or less	$	26,480	$	26,470
Due after one year through five years		52,006		50,748
Due after five years through 10 years		18,274		16,880
Due after 10 years		1,358		1,259


Total	$	98,118	$	95,357

NOTE 5 — DERIVATIVES

We use derivative instruments to manage risks related to foreign currencies, interest rates, equity prices, and credit; to enhance investment returns; and to facilitate portfolio diversification. Our objectives for holding derivatives include reducing, eliminating, and efficiently managing the economic impact of these exposures as effectively as possible. Our derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment.

Foreign Currencies

Foreign currency risks related to certain non-U.S. dollar-denominated investments are hedged using foreign exchange forward contracts that are designated as fair value hedging instruments. Foreign currency risks related to certain Euro-denominated debt are hedged using foreign exchange forward contracts that are designated as cash flow hedging instruments.

Interest Rate

Interest rate risks related to certain fixed-rate debt are hedged using interest rate swaps that are designated as fair value hedging instruments to effectively convert the fixed interest rates to floating interest rates.

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Equity

Securities held in our equity investments portfolio are subject to market price risk. At times, we may hold options, futures, and swap contracts. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.

Credit

Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit default swap contracts to manage credit exposures relative to broad-based indices and to facilitate portfolio diversification. These contracts are not designated as hedging instruments and are included in “Other contracts” in the tables below.

Credit-Risk-Related Contingent Features

Certain of our counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the standard convention related to over-the-counter derivatives. As of June 30, 2022, our long-term unsecured debt rating was AAA, and cash investments were in excess of $1.0 billion. As a result, no collateral was required to be posted.

The following table presents the notional amounts of our outstanding derivative instruments measured in U.S. dollar equivalents:

(In millions)	June 30, 2022		June 30, 2021


Designated as Hedging Instruments

Foreign exchange contracts purchased	$	635	$	635
Foreign exchange contracts sold		0		6,081
Interest rate contracts purchased		1,139		1,247

Not Designated as Hedging Instruments

Foreign exchange contracts purchased		10,322		14,223
Foreign exchange contracts sold		21,606		23,391
Other contracts purchased		2,773		2,456
Other contracts sold		544		763

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Item 8

Fair Values of Derivative Instruments

The following table presents our derivative instruments:

	Derivative			Derivative				Derivative				Derivative
(In millions)	Assets			Liabilities				Assets				Liabilities


	June 30, 2022							June 30, 2021

Designated as Hedging Instruments

Foreign exchange contracts	$	0			$	(77	)		$	76			$	(8	)
Interest rate contracts		3				0				40				0

Not Designated as Hedging Instruments

Foreign exchange contracts		333				(362	)			227				(291	)
Other contracts		20				(112	)			56				(36	)


Gross amounts of derivatives		356				(551	)			399				(335	)
Gross amounts of derivatives offset in the balance sheet		(130	)			133				(141	)			142
Cash collateral received		0				(75	)			0				(42	)


Net amounts of derivatives	$	226			$	(493	)		$	258			$	(235	)


Reported as

Short-term investments	$	8			$	0			$	78			$	0
Other current assets		218				0				137				0
Other long-term assets		0				0				43				0
Other current liabilities		0				(298	)			0				(182	)
Other long-term liabilities		0				(195	)			0				(53	)


Total	$	226			$	(493	)		$	258			$	(235	)

Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $343 million and $550 million, respectively, as of June 30, 2022, and $395 million and $335 million, respectively, as of June 30, 2021.

The following table presents the fair value of our derivatives instruments on a gross basis:

(In millions)	Level 1			Level 2		Level 3		Total


June 30, 2022

Derivative assets	$	1	$	349		$	6	$	356
Derivative liabilities		0		(551	)		0		(551	)

June 30, 2021

Derivative assets		0		396			3		399
Derivative liabilities		0		(335	)		0		(335	)

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Gains (losses) on derivative instruments recognized in other income (expense), net were as follows:

(In millions)


Year Ended June 30,	2022			2021			2020

Designated as Fair Value Hedging Instruments

Foreign exchange contracts
Derivatives	$	49		$	193		$	1
Hedged items		(50	)		(188	)		3
Excluded from effectiveness assessment		4			30			139
Interest rate contracts
Derivatives		(92	)		(37	)		93
Hedged items		108			53			(93	)

Designated as Cash Flow Hedging Instruments

Foreign exchange contracts
Amount reclassified from accumulated other comprehensive income		(79	)		17			0

Not Designated as Hedging Instruments

Foreign exchange contracts		383			27			(123	)
Other contracts		(72	)		9			50

Gains (losses), net of tax, on derivative instruments recognized in our consolidated comprehensive income statements were as follows:

(In millions)


Year Ended June 30,	2022			2021		2020

Designated as Cash Flow Hedging Instruments

Foreign exchange contracts
Included in effectiveness assessment	$	(57	)	$	34	$	(38	)

NOTE 6 — INVENTORIES

The components of inventories were as follows:

(In millions)


June 30,	2022		2021

Raw materials	$	1,144	$	1,190
Work in process		82		79
Finished goods		2,516		1,367


Total	$	3,742	$	2,636

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NOTE 7 — PROPERTY AND EQUIPMENT

The components of property and equipment were as follows:

(In millions)


June 30,	2022			2021

Land	$	4,734		$	3,660
Buildings and improvements		55,014			43,928
Leasehold improvements		7,819			6,884
Computer equipment and software		60,631			51,250
Furniture and equipment		5,860			5,344


Total, at cost		134,058			111,066
Accumulated depreciation		(59,660	)		(51,351	)


Total, net	$	74,398		$	59,715

During fiscal years 2022, 2021, and 2020, depreciation expense was $12.6 billion, $9.3 billion, and $10.7 billion, respectively. We have committed $8.5 billion, primarily related to datacenters, for the construction of new buildings, building improvements, and leasehold improvements as of June 30, 2022.

NOTE 8 — BUSINESS COMBINATIONS

Nuance Communications, Inc.

On March 4, 2022, we completed our acquisition of Nuance Communications, Inc. (“Nuance”) for a total purchase price of $18.8 billion, consisting primarily of cash. Nuance is a cloud and artificial intelligence (“AI”) software provider with healthcare and enterprise AI experience, and the acquisition will build on our industry-specific cloud offerings. The financial results of Nuance have been included in our consolidated financial statements since the date of the acquisition. Nuance is reported as part of our Intelligent Cloud segment.

The purchase price allocation as of the date of acquisition was based on a preliminary valuation and is subject to revision as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed becomes available.

The major classes of assets and liabilities to which we have preliminarily allocated the purchase price were as follows:

(In millions)


Goodwill ^(a)	$	16,308
Intangible assets		4,365
Other assets		59
Other liabilities ^(b)		(1,971	)


Total	$	18,761

(a)	Goodwill was assigned to our Intelligent Cloud segment and was primarily attributed to increased synergies that are expected to be achieved from the integration of Nuance. None of the goodwill is expected to be deductible for income tax purposes.

(b)

Includes $986 million of convertible senior notes issued by Nuance in 2015 and 2017, of which $985 million was redeemed prior to June 30, 2022. The remaining $1 million of notes are redeemable through their respective maturity dates and are included in other current liabilities on our consolidated balance sheets as of June 30, 2022.

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Following are the details of the purchase price allocated to the intangible assets acquired:

(In millions, except average life)	Amount			Weighted Average Life


Customer-related	$	2,610	9 years
Technology-based		1,540	5 years
Marketing-related		215	4 years


Total	$	4,365	7 years

ZeniMax Media Inc.

On March 9, 2021, we completed our acquisition of ZeniMax Media Inc. (“ZeniMax”), the parent company of Bethesda Softworks LLC (“Bethesda”), for a total purchase price of $8.1 billion, consisting primarily of cash. The purchase price included $766 million of cash and cash equivalents acquired. Bethesda is one of the largest, privately held game developers and publishers in the world, and brings a broad portfolio of games, technology, and talent to Xbox. The financial results of ZeniMax have been included in our consolidated financial statements since the date of the acquisition. ZeniMax is reported as part of our More Personal Computing segment.

The allocation of the purchase price to goodwill was completed as of December 31, 2021. The major classes of assets and liabilities to which we have allocated the purchase price were as follows:

(In millions)


Cash and cash equivalents	$	766
Goodwill		5,510
Intangible assets		1,968
Other assets		121
Other liabilities		(244	)


Total	$	8,121

Goodwill was assigned to our More Personal Computing segment. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of ZeniMax. None of the goodwill is expected to be deductible for income tax purposes.

Following are details of the purchase price allocated to the intangible assets acquired:

(In millions, except average life)	Amount			Weighted Average Life


Technology-based	$	1,341	4 years
Marketing-related		627	11 years


Total	$	1,968	6 years

Activision Blizzard, Inc.

On January 18, 2022, we entered into a definitive agreement to acquire Activision Blizzard, Inc. (“Activision Blizzard”) for $95.00 per share in an all-cash transaction valued at $68.7 billion, inclusive of Activision Blizzard’s net cash. Activision Blizzard is a leader in game development and an interactive entertainment content publisher. The acquisition will accelerate the growth in our gaming business across mobile, PC, console, and cloud and will provide building blocks for the metaverse. The acquisition has been approved by Activision Blizzard’s shareholders, and we expect it to close in fiscal year 2023, subject to the satisfaction of certain regulatory approvals and other customary closing conditions.

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NOTE 9 — GOODWILL

Changes in the carrying amount of goodwill were as follows:

(In millions)		June 30, 2020		Acquisitions			Other			June 30, 2021		Acquisitions			Other				June 30, 2022


Productivity and Business Processes	$	24,190	$	0		$	127		$	24,317	$	599		$	(105	)		$	24,811
Intelligent Cloud		12,697		505			54			13,256		16,879	^(b)		47		^(b)		30,182
More Personal Computing		6,464		5,556	^(a)		118	^(a)		12,138		648			(255	)			12,531


Total	$	43,351	$	6,061		$	299		$	49,711	$	18,126		$	(313	)		$	67,524

(a)	Includes goodwill of $5.5 billion related to ZeniMax. See Note 8 – Business Combinations for further information.

(b)	Includes goodwill of $16.3 billion related to Nuance. See Note 8 – Business Combinations for further information.

The measurement periods for the valuation of assets acquired and liabilities assumed end as soon as information on the facts and circumstances that existed as of the acquisition dates becomes available, but do not exceed 12 months. Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined.

Any change in the goodwill amounts resulting from foreign currency translations and purchase accounting adjustments are presented as “Other” in the table above. Also included in “Other” are business dispositions and transfers between segments due to reorganizations, as applicable.

Goodwill Impairment

We test goodwill for impairment annually on May 1 at the reporting unit level, primarily using a discounted cash flow methodology with a peer-based, risk-adjusted weighted average cost of capital. We believe use of a discounted cash flow approach is the most reliable indicator of the fair values of the businesses.

No instances of impairment were identified in our May 1, 2022, May 1, 2021, or May 1, 2020 tests. As of June 30, 2022 and 2021, accumulated goodwill impairment was $11.3 billion.

NOTE 10 — INTANGIBLE ASSETS

The components of intangible assets, all of which are finite-lived, were as follows:

(In millions)	Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount


June 30,							2022								2021

Technology-based	$	11,277		$	(6,958	)	$	4,319	$	9,779		$	(7,007	)	$	2,772
Customer-related		7,342			(3,171	)		4,171		4,958			(2,859	)		2,099
Marketing-related		4,942			(2,143	)		2,799		4,792			(1,878	)		2,914
Contract-based		16			(7	)		9		446			(431	)		15


Total	$	23,577	^(a)	$	(12,279	)	$	11,298	$	19,975	^(b)	$	(12,175	)	$	7,800

(a)	Includes intangible assets of $4.4 billion related to Nuance. See Note 8 – Business Combinations for further information.

(b)	Includes intangible assets of $2.0 billion related to ZeniMax. See Note 8 – Business Combinations for further information.

No material impairments of intangible assets were identified during fiscal years 2022, 2021, or 2020. We estimate that we have no significant residual value related to our intangible assets.

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Item 8

The components of intangible assets acquired during the periods presented were as follows:

(In millions)	Amount		Weighted Average Life		Amount		Weighted Average Life


Year Ended June 30,	2022				2021

Technology-based	$	2,611		4 years	$	1,628		4 years
Customer-related		2,837		9 years		96		4 years
Marketing-related		233		4 years		625		6 years
Contract-based		0		0 years		10		3 years


Total	$	5,681		7 years	$	2,359		5 years

Intangible assets amortization expense was $2.0 billion, $1.6 billion, and $1.6 billion for fiscal years 2022, 2021, and 2020, respectively.

The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2022:

(In millions)


Year Ending June 30,

2023	$	2,654
2024		2,385
2025		1,631
2026		1,227
2027		809
Thereafter		2,592


Total	$	11,298

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Item 8

NOTE 11 — DEBT

The components of debt were as follows:

(In millions, issuance by calendar year)	Maturities (calendar year)				Stated Interest Rate				Effective Interest Rate			June 30, 2022				June 30, 2021


2009 issuance of $3.8 billion ^(a)				2039				5.20%			5.24%		$	520		$	520
2010 issuance of $4.8 billion ^(a)				2040				4.50%			4.57%			486			486
2011 issuance of $2.3 billion ^(a)				2041				5.30%			5.36%			718			718
2012 issuance of $2.3 billion ^(a)		2022	–	2042		2.13%	–	3.50%	2.24%	–	3.57%			1,204			1,204
2013 issuance of $5.2 billion ^(a)		2023	–	2043		2.38%	–	4.88%	2.47%	–	4.92%			2,814			2,814
2013 issuance of €4.1 billion		2028	–	2033		2.63%	–	3.13%	2.69%	–	3.22%			2,404			4,803
2015 issuance of $23.8 billion ^(a)		2022	–	2055		2.65%	–	4.75%	2.72%	–	4.78%			10,805			12,305
2016 issuance of $19.8 billion ^(a)		2023	–	2056		2.00%	–	3.95%	2.10%	–	4.03%			9,430			12,180
2017 issuance of $17.0 billion ^(a)		2024	–	2057		2.88%	–	4.50%	3.04%	–	4.53%			8,945			10,695
2020 issuance of $10.0 billion ^(a)		2050	–	2060		2.53%	–	2.68%	2.53%	–	2.68%			10,000			10,000
2021 issuance of $8.2 billion ^(a)		2052	–	2062		2.92%	–	3.04%	2.92%	–	3.04%			8,185			8,185


Total face value														55,511			63,910
Unamortized discount and issuance costs														(471	)		(511	)
Hedge fair value adjustments ⁽^b⁾														(68	)		40
Premium on debt exchange ^(a)														(5,191	)		(5,293	)


Total debt														49,781			58,146
Current portion of long-term debt														(2,749	)		(8,072	)


Long-term debt													$	47,032		$	50,074

(a)	In March 2021 and June 2020, we exchanged a portion of our existing debt at a premium for cash and new debt with longer maturities. The premiums are amortized over the terms of the new debt.

(b)	Refer to Note 5 – Derivatives for further information on the interest rate swaps related to fixed-rate debt.

As of June 30, 2022 and 2021, the estimated fair value of long-term debt, including the current portion, was $50.9 billion and $70.0 billion, respectively. The estimated fair values are based on Level 2 inputs.

Debt in the table above is comprised of senior unsecured obligations and ranks equally with our other outstanding obligations. Interest is paid semi-annually, except for the Euro-denominated debt, which is paid annually. Cash paid for interest on our debt for fiscal years 2022, 2021, and 2020 was $1.9 billion, $2.0 billion, and $2.4 billion, respectively.

The following table outlines maturities of our long-term debt, including the current portion, as of June 30, 2022:

(In millions)


Year Ending June 30,

2023	$	2,750
2024		5,250
2025		2,250
2026		3,000
2027		8,000
Thereafter		34,261


Total	$	55,511

PART II

Item 8

NOTE 12 — INCOME TAXES

Provision for Income Taxes

The components of the provision for income taxes were as follows:

(In millions)


Year Ended June 30,	2022			2021			2020

Current Taxes

U.S. federal	$	8,329		$	3,285		$	3,537
U.S. state and local		1,679			1,229			763
Foreign		6,672			5,467			4,444


Current taxes	$	16,680		$	9,981		$	8,744

Deferred Taxes

U.S. federal	$	(4,815	)	$	25		$	58
U.S. state and local		(1,062	)		(204	)		(6	)
Foreign		175			29			(41	)


Deferred taxes	$	(5,702	)	$	(150	)	$	11


Provision for income taxes	$	10,978		$	9,831		$	8,755

U.S. and foreign components of income before income taxes were as follows:

(In millions)


Year Ended June 30,	2022		2021		2020

U.S.	$	47,837	$	34,972	$	24,116
Foreign		35,879		36,130		28,920


Income before income taxes	$	83,716	$	71,102	$	53,036

Effective Tax Rate

The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows:



Year Ended June 30,	2022			2021			2020

Federal statutory rate		21.0	%		21.0	%		21.0	%
Effect of:
Foreign earnings taxed at lower rates		(1.3)	%		(2.7)	%		(3.7)	%
Impact of intangible property transfers		(3.9)	%		0	%		0	%
Foreign-derived intangible income deduction		(1.1)	%		(1.3)	%		(1.1)	%
State income taxes, net of federal benefit		1.4	%		1.4	%		1.3	%
Research and development credit		(0.9)	%		(0.9)	%		(1.1)	%
Excess tax benefits relating to stock-based compensation		(1.9)	%		(2.4)	%		(2.2)	%
Interest, net		0.5	%		0.5	%		1.0	%
Other reconciling items, net		(0.7)	%		(1.8)	%		1.3	%


Effective rate		13.1	%		13.8	%		16.5	%

In the first quarter of fiscal year 2022, we transferred certain intangible properties from our Puerto Rico subsidiary to the U.S. The transfer of intangible properties resulted in a $3.3 billion net income tax benefit in the first quarter of fiscal year 2022, as the value of future U.S. tax deductions exceeds the current tax liability from the U.S. global intangible low-taxed income (“GILTI”) tax.

PART II

Item 8

We have historically paid India withholding taxes on software sales through distributor withholding and tax audit assessments in India. In March 2021, the India Supreme Court ruled favorably in the case of Engineering Analysis Centre of Excellence Private Limited vs The Commissioner of Income Tax for companies in 86 separate appeals, some dating back to 2012, holding that software sales are not subject to India withholding taxes. Although we were not a party to the appeals, our software sales in India were determined to be not subject to withholding taxes. Therefore, we recorded a net income tax benefit of $620 million in the third quarter of fiscal year 2021 to reflect the results of the India Supreme Court decision impacting fiscal year 1996 through fiscal year 2016.

The decrease from the federal statutory rate in fiscal year 2022 is primarily due to the net income tax benefit related to the transfer of intangible properties, earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations center in Ireland, and tax benefits relating to stock-based compensation. The decrease from the federal statutory rate in fiscal year 2021 is primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland and Puerto Rico, tax benefits relating to stock-based compensation, and tax benefits from the India Supreme Court decision on withholding taxes. The decrease from the federal statutory rate in fiscal year 2020 is primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland and Puerto Rico, and tax benefits relating to stock-based compensation. In fiscal years 2022, 2021, and 2020, our foreign regional operating centers in Ireland and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated 71%, 82%, and 86% of our foreign income before tax. Other reconciling items, net consists primarily of tax credits and GILTI tax, and in fiscal year 2021, includes tax benefits from the India Supreme Court decision on withholding taxes. In fiscal years 2022, 2021, and 2020, there were no individually significant other reconciling items.

The decrease in our effective tax rate for fiscal year 2022 compared to fiscal year 2021 was primarily due to a $3.3 billion net income tax benefit in the first quarter of fiscal year 2022 related to the transfer of intangible properties, offset in part by changes in the mix of our income before income taxes between the U.S. and foreign countries, as well as tax benefits in the prior year from the India Supreme Court decision on withholding taxes, an agreement between the U.S. and India tax authorities related to transfer pricing, and final Tax Cuts and Jobs Act (“TCJA”) regulations. The decrease in our effective tax rate for fiscal year 2021 compared to fiscal year 2020 was primarily due to tax benefits from the India Supreme Court decision on withholding taxes, an agreement between the U.S. and India tax authorities related to transfer pricing, final TCJA regulations, and an increase in tax benefits relating to stock-based compensation.

PART II

Item 8

The components of the deferred income tax assets and liabilities were as follows:

(In millions)


June 30,	2022			2021

Deferred Income Tax Assets

Stock-based compensation expense	$	601		$	502
Accruals, reserves, and other expenses		2,874			2,960
Loss and credit carryforwards		1,546			1,090
Amortization		10,656			6,346
Leasing liabilities		4,557			4,060
Unearned revenue		2,876			2,659
Other		461			319


Deferred income tax assets		23,571			17,936
Less valuation allowance		(1,012	)		(769	)


Deferred income tax assets, net of valuation allowance	$	22,559		$	17,167


Deferred Income Tax Liabilities

Book/tax basis differences in investments and debt	$	(174	)	$	(2,381	)
Leasing assets		(4,291	)		(3,834	)
Depreciation		(1,602	)		(1,010	)
Deferred tax on foreign earnings		(3,104	)		(2,815	)
Other		(103	)		(144	)


Deferred income tax liabilities	$	(9,274	)	$	(10,184	)


Net deferred income tax assets	$	13,285		$	6,983


Reported As

Other long-term assets	$	13,515		$	7,181
Long-term deferred income tax liabilities		(230	)		(198	)


Net deferred income tax assets	$	13,285		$	6,983

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when the taxes are paid or recovered.

As of June 30, 2022, we had federal, state, and foreign net operating loss carryforwards of $318 million, $1.3 billion, and $2.1 billion, respectively. The federal and state net operating loss carryforwards will expire in various years from fiscal 2023 through 2042, if not utilized. The majority of our foreign net operating loss carryforwards do not expire. Certain acquired net operating loss carryforwards are subject to an annual limitation but are expected to be realized with the exception of those which have a valuation allowance. As of June 30, 2022, we had $1.3 billion federal capital loss carryforwards for U.S. tax purposes from our acquisition of Nuance. The federal capital loss carryforwards are subject to an annual limitation and will expire in various years from fiscal 2023 through 2025.

The valuation allowance disclosed in the table above relates to the foreign net operating loss carryforwards, federal capital loss carryforwards, and other net deferred tax assets that may not be realized.

Income taxes paid, net of refunds, were $16.0 billion, $13.4 billion, and $12.5 billion in fiscal years 2022, 2021, and 2020, respectively.

Uncertain Tax Positions

Gross unrecognized tax benefits related to uncertain tax positions as of June 30, 2022, 2021, and 2020, were $15.6 billion, $14.6 billion, and $13.8 billion, respectively, which were primarily included in long-term income taxes in our consolidated balance sheets. If recognized, the resulting tax benefit would affect our effective tax rates for fiscal years 2022, 2021, and 2020 by $13.3 billion, $12.5 billion, and $12.1 billion, respectively.

PART II

Item 8

As of June 30, 2022, 2021, and 2020, we had accrued interest expense related to uncertain tax positions of $4.3 billion, $4.3 billion, and $4.0 billion, respectively, net of income tax benefits. The provision for income taxes for fiscal years 2022, 2021, and 2020 included interest expense related to uncertain tax positions of $36 million, $274 million, and $579 million, respectively, net of income tax benefits.

The aggregate changes in the gross unrecognized tax benefits related to uncertain tax positions were as follows:

(In millions)


Year Ended June 30,	2022			2021			2020

Beginning unrecognized tax benefits	$	14,550		$	13,792		$	13,146
Decreases related to settlements		(317	)		(195	)		(31	)
Increases for tax positions related to the current year		1,145			790			647
Increases for tax positions related to prior years		461			461			366
Decreases for tax positions related to prior years		(246	)		(297	)		(331	)
Decreases due to lapsed statutes of limitations		0			(1	)		(5	)


Ending unrecognized tax benefits	$	15,593		$	14,550		$	13,792

We settled a portion of the Internal Revenue Service (“IRS”) audit for tax years 2004 to 2006 in fiscal year 2011. In February 2012, the IRS withdrew its 2011 Revenue Agents Report related to unresolved issues for tax years 2004 to 2006 and reopened the audit phase of the examination. We also settled a portion of the IRS audit for tax years 2007 to 2009 in fiscal year 2016, and a portion of the IRS audit for tax years 2010 to 2013 in fiscal year 2018. In the second quarter of fiscal year 2021, we settled an additional portion of the IRS audits for tax years 2004 to 2013 and made a payment of $1.7 billion, including tax and interest. We remain under audit for tax years 2004 to 2017.

As of June 30, 2022, the primary unresolved issues for the IRS audits relate to transfer pricing, which could have a material impact in our consolidated financial statements when the matters are resolved. We believe our allowances for income tax contingencies are adequate. We have not received a proposed assessment for the unresolved key transfer pricing issues and do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months.

We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years 1996 to 2021, some of which are currently under audit by local tax authorities. The resolution of each of these audits is not expected to be material to our consolidated financial statements.

NOTE 13 — UNEARNED REVENUE

Unearned revenue by segment was as follows:

(In millions)


June 30,	2022		2021

Productivity and Business Processes	$	24,558	$	22,120
Intelligent Cloud		19,371		17,710
More Personal Computing		4,479		4,311


Total	$	48,408	$	44,141

Changes in unearned revenue were as follows:

(In millions)


Year Ended June 30, 2022

Balance, beginning of period	$	44,141
Deferral of revenue		110,455
Recognition of unearned revenue		(106,188	)


Balance, end of period	$	48,408

PART II

Item 8

Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $193 billion as of June 30, 2022, of which $189 billion is related to the commercial portion of revenue. We expect to recognize approximately 45% of this revenue over the next 12 months and the remainder thereafter.

NOTE 14 — LEASES

We have operating and finance leases for datacenters, corporate offices, research and development facilities, Microsoft Experience Centers, and certain equipment. Our leases have remaining lease terms of 1 year to 19 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year.

The components of lease expense were as follows:

(In millions)


Year Ended June 30,	2022			2021		2020

Operating lease cost	$	2,461	$	2,127	$	2,043


Finance lease cost:
Amortization of right-of-use assets	$	980	$	921	$	611
Interest on lease liabilities		429		386		336


Total finance lease cost	$	1,409	$	1,307	$	947

Supplemental cash flow information related to leases was as follows:

(In millions)


Year Ended June 30,	2022			2021		2020

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	2,368	$	2,052	$	1,829
Operating cash flows from finance leases		429		386		336
Financing cash flows from finance leases		896		648		409

Right-of-use assets obtained in exchange for lease obligations:
Operating leases		5,268		4,380		3,677
Finance leases		4,234		3,290		3,467

PART II

Item 8

Supplemental balance sheet information related to leases was as follows:

(In millions, except lease term and discount rate)


June 30,	2022			2021

Operating Leases

Operating lease right-of-use assets	$	13,148		$	11,088



Other current liabilities	$	2,228		$	1,962
Operating lease liabilities		11,489			9,629


Total operating lease liabilities	$	13,717		$	11,591


Finance Leases

Property and equipment, at cost	$	17,388		$	14,107
Accumulated depreciation		(3,285	)		(2,306	)


Property and equipment, net	$	14,103		$	11,801



Other current liabilities	$	1,060		$	791
Other long-term liabilities		13,842			11,750


Total finance lease liabilities	$	14,902		$	12,541


Weighted Average Remaining Lease Term

Operating leases		8 years			8 years
Finance leases		12 years			12 years

Weighted Average Discount Rate

Operating leases		2.1%			2.2%
Finance leases		3.1%			3.4%

The following table outlines maturities of our lease liabilities as of June 30, 2022:

(In millions)


Year Ending June 30,	Operating Leases			Finance Leases

2023	$	2,456		$	1,477
2024		2,278			1,487
2025		1,985			1,801
2026		1,625			1,483
2027		1,328			1,489
Thereafter		5,332			9,931


Total lease payments		15,004			17,668
Less imputed interest		(1,287	)		(2,766	)


Total	$	13,717		$	14,902

As of June 30, 2022, we have additional operating and finance leases, primarily for datacenters, that have not yet commenced of $7.2 billion and $8.8 billion, respectively. These operating and finance leases will commence between fiscal year 2023 and fiscal year 2028 with lease terms of 1 year to 18 years.

PART II

Item 8

NOTE 15 — CONTINGENCIES

Antitrust Litigation and Claims

China State Administration for Market Regulation Investigation

In 2014, Microsoft was informed that China’s State Agency for Market Regulation (“SAMR”) (formerly State Administration for Industry and Commerce) had begun a formal investigation relating to China’s Anti-Monopoly Law, and the SAMR conducted onsite inspections of Microsoft offices in Beijing, Shanghai, Guangzhou, and Chengdu. In 2019, the SAMR presented preliminary views as to certain possible violations of China’s Anti-Monopoly Law.

Product-Related Litigation

U.S. Cell Phone Litigation

Microsoft Mobile Oy, a subsidiary of Microsoft, along with other handset manufacturers and network operators, is a defendant in 46 lawsuits, including 45 lawsuits filed in the Superior Court for the District of Columbia by individual plaintiffs who allege that radio emissions from cellular handsets caused their brain tumors and other adverse health effects. We assumed responsibility for these claims in our agreement to acquire Nokia’s Devices and Services business and have been substituted for the Nokia defendants. Nine of these cases were filed in 2002 and are consolidated for certain pre-trial proceedings; the remaining cases are stayed. In a separate 2009 decision, the Court of Appeals for the District of Columbia held that adverse health effect claims arising from the use of cellular handsets that operate within the U.S. Federal Communications Commission radio frequency emission guidelines (“FCC Guidelines”) are pre-empted by federal law. The plaintiffs allege that their handsets either operated outside the FCC Guidelines or were manufactured before the FCC Guidelines went into effect. The lawsuits also allege an industry-wide conspiracy to manipulate the science and testing around emission guidelines.

In 2013, the defendants in the consolidated cases moved to exclude the plaintiffs’ expert evidence of general causation on the basis of flawed scientific methodologies. In 2014, the trial court granted in part and denied in part the defendants’ motion to exclude the plaintiffs’ general causation experts. The defendants filed an interlocutory appeal to the District of Columbia Court of Appeals challenging the standard for evaluating expert scientific evidence. In October 2016, the Court of Appeals issued its decision adopting the standard advocated by the defendants and remanding the cases to the trial court for further proceedings under that standard. The plaintiffs have filed supplemental expert evidence, portions of which the defendants have moved to strike. In August 2018, the trial court issued an order striking portions of the plaintiffs’ expert reports. A hearing on general causation is scheduled for September of 2022.

Other Contingencies

We also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact in our consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.

As of June 30, 2022, we accrued aggregate legal liabilities of $364 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $600 million in aggregate beyond recorded amounts are reasonably possible. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact in our consolidated financial statements for the period in which the effects become reasonably estimable.

PART II

Item 8

NOTE 16 — STOCKHOLDERS’ EQUITY

Shares Outstanding

Shares of common stock outstanding were as follows:

(In millions)


Year Ended June 30,	2022			2021			2020

Balance, beginning of year		7,519			7,571			7,643
Issued		40			49			54
Repurchased		(95	)		(101	)		(126	)


Balance, end of year		7,464			7,519			7,571

Share Repurchases

On September 20, 2016, our Board of Directors approved a share repurchase program authorizing up to $40.0 billion in share repurchases. This share repurchase program commenced in December 2016 and was completed in February 2020.

On September 14, 2021, our Board of Directors approved a share repurchase program authorizing up to $60.0 billion in share repurchases. This share repurchase program commenced in November 2021, following completion of the program approved on September 18, 2019, has no expiration date, and may be terminated at any time. As of June 30, 2022, $40.7 billion remained of this $60.0 billion share repurchase program.

We repurchased the following shares of common stock under the share repurchase programs:

(In millions)	Shares		Amount		Shares		Amount		Shares		Amount


Year Ended June 30,	2022				2021				2020

First Quarter		21	$	6,200		25	$	5,270		29	$	4,000
Second Quarter		20		6,233		27		5,750		32		4,600
Third Quarter		26		7,800		25		5,750		37		6,000
Fourth Quarter		28		7,800		24		6,200		28		5,088


Total		95	$	28,033		101	$	22,970		126	$	19,688

All repurchases were made using cash resources. Shares repurchased during the fourth and third quarters of fiscal year 2022 were under the share repurchase program approved on September 14, 2021. Shares repurchased during the second quarter of fiscal year 2022 were under the share repurchase programs approved on both September 14, 2021 and September 18, 2019. Shares repurchased during the first quarter of fiscal year 2022, fiscal year 2021, and the fourth quarter of fiscal year 2020 were under the share repurchase program approved on September 18, 2019. Shares repurchased during the third quarter of fiscal year 2020 were under the share repurchase programs approved on both September 20, 2016 and September 18, 2019. All other shares repurchased were under the share repurchase program approved on September 20, 2016. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards of $4.7 billion, $4.4 billion, and $3.3 billion for fiscal years 2022, 2021, and 2020, respectively.

PART II

Item 8

Dividends

Our Board of Directors declared the following dividends:

Declaration Date	Record Date		Payment Date		Dividend Per Share			Amount


Fiscal Year 2022								(In millions)

September 14, 2021		November 18, 2021		December 9, 2021		$	0.62	$	4,652
December 7, 2021		February 17, 2022		March 10, 2022			0.62		4,645
March 14, 2022		May 19, 2022		June 9, 2022			0.62		4,632
June 14, 2022		August 18, 2022		September 8, 2022			0.62		4,627


Total						$	2.48	$	18,556


Fiscal Year 2021

September 15, 2020		November 19, 2020		December 10, 2020		$	0.56	$	4,230
December 2, 2020		February 18, 2021		March 11, 2021			0.56		4,221
March 16, 2021		May 20, 2021		June 10, 2021			0.56		4,214
June 16, 2021		August 19, 2021		September 9, 2021			0.56		4,206


Total						$	2.24	$	16,871

The dividend declared on June 14, 2022 was included in other current liabilities as of June 30, 2022.

PART II

Item 8

NOTE 17 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes in accumulated other comprehensive income (loss) by component:

(In millions)


Year Ended June 30,	2022			2021			2020

Derivatives

Balance, beginning of period	$	(19	)	$	(38	)	$	0
Unrealized gains (losses), net of tax of $(15), $9, and $(10)		(57	)		34			(38	)
Reclassification adjustments for (gains) losses included in other income (expense), net		79			(17	)		0
Tax expense (benefit) included in provision for income taxes		(16	)		2			0


Amounts reclassified from accumulated other comprehensive income (loss)		63			(15	)		0


Net change related to derivatives, net of tax of $1, $7, and $(10)		6			19			(38	)


Balance, end of period	$	(13	)	$	(19	)	$	(38	)


Investments

Balance, beginning of period	$	3,222		$	5,478		$	1,488
Unrealized gains (losses), net of tax of $(1,440), $(589), and $1,057		(5,405	)		(2,216	)		3,987
Reclassification adjustments for (gains) losses included in other income (expense), net		57			(63	)		4
Tax expense (benefit) included in provision for income taxes		(12	)		13			(1	)


Amounts reclassified from accumulated other comprehensive income (loss)		45			(50	)		3


Net change related to investments, net of tax of $(1,428), $(602), and $1,058		(5,360	)		(2,266	)		3,990
Cumulative effect of accounting changes		0			10			0


Balance, end of period	$	(2,138	)	$	3,222		$	5,478


Translation Adjustments and Other

Balance, beginning of period	$	(1,381	)	$	(2,254	)	$	(1,828	)
Translation adjustments and other, net of tax of $0, $(9), and $1		(1,146	)		873			(426	)


Balance, end of period	$	(2,527	)	$	(1,381	)	$	(2,254	)


Accumulated other comprehensive income (loss), end of period	$	(4,678	)	$	1,822		$	3,186

NOTE 18 — EMPLOYEE STOCK AND SAVINGS PLANS

We grant stock-based compensation to employees and directors. Awards that expire or are canceled without delivery of shares generally become available for issuance under the plans. We issue new shares of Microsoft common stock to satisfy vesting of awards granted under our stock plans. We also have an ESPP for all eligible employees.

Stock-based compensation expense and related income tax benefits were as follows:

(In millions)


Year Ended June 30,	2022		2021		2020

Stock-based compensation expense	$	7,502	$	6,118	$	5,289
Income tax benefits related to stock-based compensation		1,293		1,065		938

Stock Plans

Stock awards entitle the holder to receive shares of Microsoft common stock as the award vests. Stock awards generally vest over a service period of four years or five years.

PART II

Item 8

Executive Incentive Plan

Under the Executive Incentive Plan, the Compensation Committee approves stock awards to executive officers and certain senior executives. RSUs generally vest ratably over a service period of four years. PSUs generally vest over a performance period of three years. The number of shares the PSU holder receives is based on the extent to which the corresponding performance goals have been achieved.

Activity for All Stock Plans

The fair value of stock awards was estimated on the date of grant using the following assumptions:



Year ended June 30,				2022				2021				2020

Dividends per share (quarterly amounts)	$	0.56	–	0.62	$	0.51	–	0.56	$	0.46	–	0.51
Interest rates		0.03%	–	3.6%		0.01%	–	1.5%		0.1%	–	2.2%

During fiscal year 2022, the following activity occurred under our stock plans:

Shares			Weighted Average Grant-Date Fair Value


(In millions)

Stock Awards

Nonvested balance, beginning of year	100		$	152.51
Granted ^(a)	50			291.22
Vested	(47	)		143.10
Forfeited	(10	)		189.88


Nonvested balance, end of year	93		$	227.59

(a)	Includes 1 million, 2 million, and 2 million of PSUs granted at target and performance adjustments above target levels for fiscal years 2022, 2021, and 2020, respectively.

As of June 30, 2022, there was approximately $16.7 billion of total unrecognized compensation costs related to stock awards. These costs are expected to be recognized over a weighted average period of three years. The weighted average grant-date fair value of stock awards granted was $291.22, $221.13, and $140.49 for fiscal years 2022, 2021, and 2020, respectively. The fair value of stock awards vested was $14.1 billion, $13.4 billion, and $10.1 billion, for fiscal years 2022, 2021, and 2020, respectively. As of June 30, 2022, an aggregate of 211 million shares were authorized for future grant under our stock plans.

Employee Stock Purchase Plan

We have an ESPP for all eligible employees. Shares of our common stock may be purchased by employees at three-month intervals at 90% of the fair market value on the last trading day of each three-month period. Employees may purchase shares having a value not exceeding 15% of their gross compensation during an offering period. Under the terms of the ESPP that were approved in 2012, the plan was set to terminate on December 31, 2022. At our 2021 Annual Shareholders Meeting, our shareholders approved a successor ESPP with a January 1, 2022 effective date and ten-year expiration of December 31, 2031. No additional shares were requested at this meeting.

Employees purchased the following shares during the periods presented:

(Shares in millions)


Year Ended June 30,	2022		2021		2020

Shares purchased		7		8		9
Average price per share	$	259.55	$	207.88	$	142.22

As of June 30, 2022, 81 million shares of our common stock were reserved for future issuance through the ESPP.

PART II

Item 8

Savings Plans

We have savings plans in the U.S. that qualify under Section 401(k) of the Internal Revenue Code, and a number of savings plans in international locations. Eligible U.S. employees may contribute a portion of their salary into the savings plans, subject to certain limitations. We match a portion of each dollar a participant contributes into the plans. Employer-funded retirement benefits for all plans were $1.4 billion, $1.2 billion, and $1.0 billion in fiscal years 2022, 2021, and 2020, respectively, and were expensed as contributed.

NOTE 19 — SEGMENT INFORMATION AND GEOGRAPHIC DATA

In its operation of the business, management, including our chief operating decision maker, who is also our Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with GAAP. During the periods presented, we reported our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.

Our reportable segments are described below.

Productivity and Business Processes

Our Productivity and Business Processes segment consists of products and services in our portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. This segment primarily comprises:

•

Office Commercial (Office 365 subscriptions, the Office 365 portion of Microsoft 365 Commercial subscriptions, and Office licensed on-premises), comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, and Microsoft Viva.

•

Office Consumer, including Microsoft 365 Consumer subscriptions, Office licensed on-premises, and other Office services.

•

LinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, and Sales Solutions.

•

Dynamics business solutions, including Dynamics 365, comprising a set of intelligent, cloud-based applications across ERP, CRM, Customer Insights, Power Apps, and Power Automate; and on-premises ERP and CRM applications.

Intelligent Cloud

Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business and developers. This segment primarily comprises:

•

Server products and cloud services, including Azure and other cloud services; SQL Server, Windows Server, Visual Studio, System Center, and related Client Access Licenses (“CALs”); and Nuance and GitHub.

•

Enterprise Services, including Enterprise Support Services, Microsoft Consulting Services, and Nuance professional services.

More Personal Computing

Our More Personal Computing segment consists of products and services that put customers at the center of the experience with our technology. This segment primarily comprises:

•

Windows, including Windows OEM licensing and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; and Windows Internet of Things.

•

Devices, including Surface and PC accessories.

•

Gaming, including Xbox hardware and Xbox content and services, comprising first- and third-party content (including games and in-game content), Xbox Game Pass and other subscriptions, Xbox Cloud Gaming, third-party disc royalties, advertising, and other cloud services.

•

Search and news advertising.

PART II

Item 8

Revenue and costs are generally directly attributed to our segments. However, due to the integrated structure of our business, certain revenue recognized and costs incurred by one segment may benefit other segments. Revenue from certain contracts is allocated among the segments based on the relative value of the underlying products and services, which can include allocation based on actual prices charged, prices when sold separately, or estimated costs plus a profit margin. Cost of revenue is allocated in certain cases based on a relative revenue methodology. Operating expenses that are allocated primarily include those relating to marketing of products and services from which multiple segments benefit and are generally allocated based on relative gross margin.

In addition, certain costs incurred at a corporate level that are identifiable and that benefit our segments are allocated to them. These allocated costs include legal, including settlements and fines, information technology, human resources, finance, excise taxes, field selling, shared facilities services, and customer service and support. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated.

Segment revenue and operating income were as follows during the periods presented:

(In millions)


Year Ended June 30,		2022		2021		2020

Revenue

Productivity and Business Processes	$	63,364	$	53,915	$	46,398
Intelligent Cloud		75,251		60,080		48,366
More Personal Computing		59,655		54,093		48,251


Total	$	198,270	$	168,088	$	143,015


Operating Income

Productivity and Business Processes	$	29,687	$	24,351	$	18,724
Intelligent Cloud		32,721		26,126		18,324
More Personal Computing		20,975		19,439		15,911


Total	$	83,383	$	69,916	$	52,959

No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for fiscal years 2022, 2021, or 2020. Revenue, classified by the major geographic areas in which our customers were located, was as follows:

(In millions)


Year Ended June 30,	2022		2021		2020

United States ^(a)	$	100,218	$	83,953	$	73,160
Other countries		98,052		84,135		69,855


Total	$	198,270	$	168,088	$	143,015

(a)	Includes billings to OEMs and certain multinational organizations because of the nature of these businesses and the impracticability of determining the geographic source of the revenue.

PART II

Item 8

Revenue, classified by significant product and service offerings, was as follows:

(In millions)


Year Ended June 30,	2022		2021		2020

Server products and cloud services	$	67,321	$	52,589	$	41,379
Office products and cloud services		44,862		39,872		35,316
Windows		24,761		22,488		21,510
Gaming		16,230		15,370		11,575
LinkedIn		13,816		10,289		8,077
Search and news advertising		11,591		9,267		8,524
Enterprise Services		7,407		6,943		6,409
Devices		6,991		6,791		6,457
Other		5,291		4,479		3,768


Total	$	198,270	$	168,088	$	143,015

We have recast certain previously reported amounts in the table above to conform to the way we internally manage and monitor our business.

Our Microsoft Cloud (formerly commercial cloud) revenue, which includes Azure and other cloud services, Office 365 Commercial, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties, was $91.2 billion, $69.1 billion and $51.7 billion in fiscal years 2022, 2021, and 2020, respectively. These amounts are primarily included in Server products and cloud services, Office products and cloud services, and LinkedIn in the table above.

Assets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment. It is impracticable for us to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss.

Long-lived assets, excluding financial instruments and tax assets, classified by the location of the controlling statutory company and with countries over 10% of the total shown separately, were as follows:

(In millions)


June 30,	2022		2021		2020

United States	$	106,430	$	76,153	$	60,789
Ireland		15,505		13,303		12,734
Other countries		44,433		38,858		29,770


Total	$	166,368	$	128,314	$	103,293

PART II

Item 8

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Microsoft Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the "Company") as of June 30, 2022 and 2021, the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity, for each of the three years in the period ended June 30, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2022, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 28, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

PART II

Item 8

Revenue Recognition – Refer to Note 1 to the financial statements

Critical Audit Matter Description

The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company offers customers the ability to acquire multiple licenses of software products and services, including cloud-based services, in its customer agreements through its volume licensing programs.

Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following:

•

Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as software licenses and related services that are sold with cloud-based services.

•

The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation.

•

Identification and treatment of contract terms that may impact the timing and amount of revenue recognized (e.g., variable consideration, optional purchases, and free services).

•

Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately.

Given these factors and due to the volume of transactions, the related audit effort in evaluating management's judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment.

How the Critical Audit Matter Was Addressed in the Audit

Our principal audit procedures related to the Company's revenue recognition for these customer agreements included the following:

•

We tested the effectiveness of controls related to the identification of distinct performance obligations, the determination of the timing of revenue recognition, and the estimation of variable consideration.

•

We evaluated management's significant accounting policies related to these customer agreements for reasonableness.

•

We selected a sample of customer agreements and performed the following procedures:

Obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement.

Tested management's identification and treatment of contract terms.

Assessed the terms in the customer agreement and evaluated the appropriateness of management's application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions.

•

We evaluated the reasonableness of management's estimate of stand-alone selling prices for products and services that are not sold separately.

•

We tested the mathematical accuracy of management's calculations of revenue and the associated timing of revenue recognized in the financial statements.

PART II

Item 8

Income Taxes – Uncertain Tax Positions – Refer to Note 12 to the financial statements

Critical Audit Matter Description

The Company's long-term income taxes liability includes uncertain tax positions related to transfer pricing issues that remain unresolved with the Internal Revenue Service ("IRS"). The Company remains under IRS audit, or subject to IRS audit, for tax years subsequent to 2003. While the Company has settled a portion of the IRS audits, resolution of the remaining matters could have a material impact on the Company's financial statements.

Conclusions on recognizing and measuring uncertain tax positions involve significant estimates and management judgment and include complex considerations of the Internal Revenue Code, related regulations, tax case laws, and prior-year audit settlements. Given the complexity and the subjective nature of the transfer pricing issues that remain unresolved with the IRS, evaluating management's estimates relating to their determination of uncertain tax positions required extensive audit effort and a high degree of auditor judgment, including involvement of our tax specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our principal audit procedures to evaluate management's estimates of uncertain tax positions related to unresolved transfer pricing issues included the following:

•

We evaluated the appropriateness and consistency of management's methods and assumptions used in the identification, recognition, measurement, and disclosure of uncertain tax positions, which included testing the effectiveness of the related internal controls.

•

We read and evaluated management's documentation, including relevant accounting policies and information obtained by management from outside tax specialists, that detailed the basis of the uncertain tax positions.

•

We tested the reasonableness of management's judgments regarding the future resolution of the uncertain tax positions, including an evaluation of the technical merits of the uncertain tax positions.

•

For those uncertain tax positions that had not been effectively settled, we evaluated whether management had appropriately considered new information that could significantly change the recognition, measurement or disclosure of the uncertain tax positions.

•

We evaluated the reasonableness of management's estimates by considering how tax law, including statutes, regulations and case law, impacted management's judgments.

/s/ DELOITTE & TOUCHE LLP

Seattle, Washington

July 28, 2022

We have served as the Company's auditor since 1983.

PART II

Item 9, 9A

YEAR 2021

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INCOME STATEMENTS

(In millions, except per share amounts)


Year Ended June 30,	2021		2020		2019

Revenue:
Product	$	71,074	$	68,041	$	66,069
Service and other		97,014		74,974		59,774


Total revenue		168,088		143,015		125,843


Cost of revenue:
Product		18,219		16,017		16,273
Service and other		34,013		30,061		26,637


Total cost of revenue		52,232		46,078		42,910


Gross margin		115,856		96,937		82,933
Research and development		20,716		19,269		16,876
Sales and marketing		20,117		19,598		18,213
General and administrative		5,107		5,111		4,885


Operating income		69,916		52,959		42,959
Other income, net		1,186		77		729


Income before income taxes		71,102		53,036		43,688
Provision for income taxes		9,831		8,755		4,448


Net income	$	61,271	$	44,281	$	39,240


Earnings per share:
Basic	$	8.12	$	5.82	$	5.11
Diluted	$	8.05	$	5.76	$	5.06

Weighted average shares outstanding:
Basic		7,547		7,610		7,673
Diluted		7,608		7,683		7,753

Refer to accompanying notes.

PART II

Item 8

COMPREHENSIVE INCOME STATEMENTS

(In millions)


Year Ended June 30,	2021			2020			2019

Net income	$	61,271		$	44,281		$	39,240


Other comprehensive income (loss), net of tax:
Net change related to derivatives		19			(38	)		(173	)
Net change related to investments		(2,266	)		3,990			2,405
Translation adjustments and other		873			(426	)		(318	)


Other comprehensive income (loss)		(1,374	)		3,526			1,914


Comprehensive income	$	59,897		$	47,807		$	41,154

Refer to accompanying notes.

PART II

Item 8

BALANCE SHEETS

(In millions)


June 30,	2021		2020

Assets
Current assets:
Cash and cash equivalents	$	14,224	$	13,576
Short-term investments		116,110		122,951


Total cash, cash equivalents, and short-term investments		130,334		136,527
Accounts receivable, net of allowance for doubtful accounts of $751 and $788		38,043		32,011
Inventories		2,636		1,895
Other current assets		13,393		11,482


Total current assets		184,406		181,915
Property and equipment, net of accumulated depreciation of $51,351 and $43,197		59,715		44,151
Operating lease right-of-use assets		11,088		8,753
Equity investments		5,984		2,965
Goodwill		49,711		43,351
Intangible assets, net		7,800		7,038
Other long-term assets		15,075		13,138


Total assets	$	333,779	$	301,311


Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	15,163	$	12,530
Current portion of long-term debt		8,072		3,749
Accrued compensation		10,057		7,874
Short-term income taxes		2,174		2,130
Short-term unearned revenue		41,525		36,000
Other current liabilities		11,666		10,027


Total current liabilities		88,657		72,310
Long-term debt		50,074		59,578
Long-term income taxes		27,190		29,432
Long-term unearned revenue		2,616		3,180
Deferred income taxes		198		204
Operating lease liabilities		9,629		7,671
Other long-term liabilities		13,427		10,632


Total liabilities		191,791		183,007


Commitments and contingencies
Stockholders’ equity:
Common stock and paid-in capital – shares authorized 24,000; outstanding 7,519 and 7,571		83,111		80,552
Retained earnings		57,055		34,566
Accumulated other comprehensive income		1,822		3,186


Total stockholders’ equity		141,988		118,304


Total liabilities and stockholders’ equity	$	333,779	$	301,311

Refer to accompanying notes.

PART II

Item 8

CASH FLOWS STATEMENTS

(In millions)


Year Ended June 30,	2021			2020			2019

Operations
Net income	$	61,271		$	44,281		$	39,240
Adjustments to reconcile net income to net cash from operations:
Depreciation, amortization, and other		11,686			12,796			11,682
Stock-based compensation expense		6,118			5,289			4,652
Net recognized gains on investments and derivatives		(1,249	)		(219	)		(792	)
Deferred income taxes		(150	)		11			(6,463	)
Changes in operating assets and liabilities:
Accounts receivable		(6,481	)		(2,577	)		(2,812	)
Inventories		(737	)		168			597
Other current assets		(932	)		(2,330	)		(1,718	)
Other long-term assets		(3,459	)		(1,037	)		(1,834	)
Accounts payable		2,798			3,018			232
Unearned revenue		4,633			2,212			4,462
Income taxes		(2,309	)		(3,631	)		2,929
Other current liabilities		4,149			1,346			1,419
Other long-term liabilities		1,402			1,348			591


Net cash from operations		76,740			60,675			52,185


Financing
Cash premium on debt exchange		(1,754	)		(3,417	)		0
Repayments of debt		(3,750	)		(5,518	)		(4,000	)
Common stock issued		1,693			1,343			1,142
Common stock repurchased		(27,385	)		(22,968	)		(19,543	)
Common stock cash dividends paid		(16,521	)		(15,137	)		(13,811	)
Other, net		(769	)		(334	)		(675	)


Net cash used in financing		(48,486	)		(46,031	)		(36,887	)


Investing
Additions to property and equipment		(20,622	)		(15,441	)		(13,925	)
Acquisition of companies, net of cash acquired, and purchases of intangible and other assets		(8,909	)		(2,521	)		(2,388	)
Purchases of investments		(62,924	)		(77,190	)		(57,697	)
Maturities of investments		51,792			66,449			20,043
Sales of investments		14,008			17,721			38,194
Other, net		(922	)		(1,241	)		0


Net cash used in investing		(27,577	)		(12,223	)		(15,773	)


Effect of foreign exchange rates on cash and cash equivalents		(29	)		(201	)		(115	)


Net change in cash and cash equivalents		648			2,220			(590	)
Cash and cash equivalents, beginning of period		13,576			11,356			11,946


Cash and cash equivalents, end of period	$	14,224		$	13,576		$	11,356

Refer to accompanying notes.

PART II

Item 8

STOCKHOLDERS’ EQUITY STATEMENTS

(In millions, except per share amounts)


Year Ended June 30,	2021			2020			2019

Common stock and paid-in capital

Balance, beginning of period	$	80,552		$	78,520		$	71,223
Common stock issued		1,963			1,343			6,829
Common stock repurchased		(5,539	)		(4,599	)		(4,195	)
Stock-based compensation expense		6,118			5,289			4,652
Other, net		17			(1	)		11


Balance, end of period		83,111			80,552			78,520


Retained earnings

Balance, beginning of period		34,566			24,150			13,682
Net income		61,271			44,281			39,240
Common stock cash dividends		(16,871	)		(15,483	)		(14,103	)
Common stock repurchased		(21,879	)		(18,382	)		(15,346	)
Cumulative effect of accounting changes		(32	)		0			677


Balance, end of period		57,055			34,566			24,150


Accumulated other comprehensive income (loss)

Balance, beginning of period		3,186			(340	)		(2,187	)
Other comprehensive income (loss)		(1,374	)		3,526			1,914
Cumulative effect of accounting changes		10			0			(67	)


Balance, end of period		1,822			3,186			(340	)


Total stockholders’ equity	$	141,988		$	118,304		$	102,330


Cash dividends declared per common share	$	2.24		$	2.04		$	1.84

Refer to accompanying notes.

PART II

Item 8

NOTES TO FINANCIAL STATEMENTS

NOTE 1 — ACCOUNTING POLICIES

Accounting Principles

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Principles of Consolidation

The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated.

Estimates and Assumptions

In July 2020, we completed an assessment of the useful lives of our server and network equipment and determined we should increase the estimated useful life of server equipment from three years to four years and increase the estimated useful life of network equipment from two years to four years. This change in accounting estimate was effective beginning fiscal year 2021. Based on the carrying amount of server and network equipment included in property and equipment, net as of June 30, 2020, the effect of this change in estimate for fiscal year 2021 was an increase in operating income of $2.7 billion and net income of $2.3 billion, or $0.30 per both basic and diluted share.

Foreign Currencies

Revenue

Product Revenue and Service and Other Revenue

PART II

Item 8

Revenue Recognition

Nature of Products and Services

Refer to Note 19 – Segment Information and Geographic Data for further information, including revenue by significant product and service offering.

Significant Judgments

PART II

Item 8

Contract Balances and Other Receivables

Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include SA and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for consulting services to be performed in the future, LinkedIn subscriptions, Office 365 subscriptions, Xbox subscriptions, Windows 10 post-delivery support, Dynamics business solutions, and other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service.

Refer to Note 13 – Unearned Revenue for further information, including unearned revenue by segment and changes in unearned revenue during the period.

As of June 30, 2021 and 2020, other receivables due from suppliers were $965 million and $442 million, respectively, and are included in accounts receivable, net in our consolidated balance sheets.

As of June 30, 2021 and 2020, long-term accounts receivable, net of allowance for doubtful accounts, was $3.4 billion and $2.7 billion, respectively, and is included in other long-term assets in our consolidated balance sheets.

PART II

Item 8

Activity in the allowance for doubtful accounts was as follows:

(In millions)


Year Ended June 30,		2021			2020			2019

Balance, beginning of period	$	816		$	434		$	397
Charged to costs and other		234			560			153
Write-offs		(252	)		(178	)		(116	)


Balance, end of period	$	798		$	816		$	434

Allowance for doubtful accounts included in our consolidated balance sheets:

(In millions)


June 30,		2021		2020		2019

Accounts receivable, net of allowance for doubtful accounts	$	751	$	788	$	411
Other long-term assets		47		28		23


Total	$	798	$	816	$	434

We record financing receivables when we offer certain of our customers the option to acquire our software products and services offerings through a financing program in a limited number of countries. As of June 30, 2021 and 2020, our financing receivables, net were $4.4 billion and $5.2 billion, respectively, for short-term and long-term financing receivables, which are included in other current assets and other long-term assets in our consolidated balance sheets. We record an allowance to cover expected losses based on troubled accounts, historical experience, and other currently available evidence.

Assets Recognized from Costs to Obtain a Contract with a Customer

Cost of Revenue

Product Warranty

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Item 8

Research and Development

Sales and Marketing

Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel, and the costs of advertising, promotions, trade shows, seminars, and other programs. Advertising costs are expensed as incurred. Advertising expense was $1.5 billion, $1.6 billion, and $1.6 billion in fiscal years 2021, 2020, and 2019, respectively.

Stock-Based Compensation

Compensation expense for the employee stock purchase plan (“ESPP”) is measured as the discount the employee is entitled to upon purchase and is recognized in the period of purchase.

Income Taxes

Financial Instruments

Investments

PART II

Item 8

Derivatives

For derivative instruments designated as cash flow hedges, gains and losses are initially reported as a component of other comprehensive income and subsequently recognized in earnings with the corresponding hedged item. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in earnings.

For derivative instruments that are not designated as hedges, gains and losses from changes in fair values are primarily recognized in other income (expense), net.

Fair Value Measurements

•

Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies. Our Level 2 investments include commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Our Level 2 derivative assets and liabilities primarily include certain over-the-counter option and swap contracts.

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•

Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.

Inventories

Property and Equipment

Leases

Goodwill

PART II

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Intangible Assets

Recent Accounting Guidance

Recently Adopted Accounting Guidance

Financial Instruments – Credit Losses

In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We adopted the standard effective July 1, 2020. We use a forward-looking expected credit loss model for accounts receivable, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities are recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. We applied a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align our credit loss methodology with the new standard. The adoption of the standard did not have a material impact on our consolidated financial statements.

Recent Accounting Guidance Not Yet Adopted

Accounting for Income Taxes

In December 2019, the FASB issued a new standard to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard will be effective for us beginning July 1, 2021. We have completed our assessment and concluded that adoption of the new standard will not have a material impact on our consolidated financial statements.

NOTE 2 — EARNINGS PER SHARE

The components of basic and diluted EPS were as follows:

(In millions, except earnings per share)


Year Ended June 30,	2021		2020		2019

Net income available for common shareholders (A)	$	61,271	$	44,281	$	39,240
Weighted average outstanding shares of common stock (B)		7,547		7,610		7,673
Dilutive effect of stock-based awards		61		73		80


Common stock and common stock equivalents (C)		7,608		7,683		7,753


Earnings Per Share

Basic (A/B)	$	8.12	$	5.82	$	5.11
Diluted (A/C)	$	8.05	$	5.76	$	5.06

Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.

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NOTE 3 — OTHER INCOME (EXPENSE), NET

The components of other income (expense), net were as follows:

(In millions)


Year Ended June 30,	2021			2020			2019

Interest and dividends income	$	2,131		$	2,680		$	2,762
Interest expense		(2,346	)		(2,591	)		(2,686	)
Net recognized gains on investments		1,232			32			648
Net gains on derivatives		17			187			144
Net gains (losses) on foreign currency remeasurements		54			(191	)		(82	)
Other, net		98			(40	)		(57	)


Total	$	1,186		$	77		$	729

Net Recognized Gains (Losses) on Investments

Net recognized gains (losses) on debt investments were as follows:

(In millions)


Year Ended June 30,	2021			2020			2019

Realized gains from sales of available-for-sale securities	$	105		$	50		$	12
Realized losses from sales of available-for-sale securities		(40	)		(37	)		(93	)
Impairments and allowance for credit losses		(2	)		(17	)		(16	)


Total	$	63		$	(4	)	$	(97	)

Net recognized gains (losses) on equity investments were as follows:

(In millions)


Year Ended June 30,	2021			2020			2019

Net realized gains on investments sold	$	123		$	83		$	276
Net unrealized gains on investments still held		1,057			69			479
Impairments of investments		(11	)		(116	)		(10	)


Total	$	1,169		$	36		$	745

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NOTE 4 — INVESTMENTS

Investment Components

The components of investments were as follows:

(In millions)	Fair Value Level		Adjusted Cost Basis		Unrealized Gains		Unrealized Losses			Recorded Basis		Cash and Cash Equivalents		Short-term Investments		Equity Investments


June 30, 2021

Changes in Fair Value Recorded in Other Comprehensive Income

Commercial paper		Level 2	$	4,316	$	0	$	0		$	4,316	$	1,331	$	2,985	$	0
Certificates of deposit		Level 2		3,615		0		0			3,615		2,920		695		0
U.S. government securities		Level 1		90,664		3,832		(111	)		94,385		1,500		92,885		0
U.S. agency securities		Level 2		807		2		0			809		0		809		0
Foreign government bonds		Level 2		6,213		9		(2	)		6,220		225		5,995		0
Mortgage- and asset-backed securities		Level 2		3,442		22		(6	)		3,458		0		3,458		0
Corporate notes and bonds		Level 2		8,443		249		(9	)		8,683		0		8,683		0
Corporate notes and bonds		Level 3		63		0		0			63		0		63		0
Municipal securities		Level 2		308		63		0			371		0		371		0
Municipal securities		Level 3		95		0		(7	)		88		0		88		0


Total debt investments			$	117,966	$	4,177	$	(135	)	$	122,008	$	5,976	$	116,032	$	0


Changes in Fair Value Recorded in Net Income

Equity investments		Level 1								$	1,582	$	976	$	0	$	606
Equity investments		Other									5,378		0		0		5,378


Total equity investments										$	6,960	$	976	$	0	$	5,984


Cash										$	7,272	$	7,272	$	0	$	0
Derivatives, net^(a)											78		0		78		0


Total										$	136,318	$	14,224	$	116,110	$	5,984

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(In millions)	Fair Value Level		Adjusted Cost Basis		Unrealized Gains		Unrealized Losses			Recorded Basis		Cash and Cash Equivalents		Short-term Investments		Equity Investments


June 30, 2020

Changes in Fair Value Recorded in Other Comprehensive Income

Commercial paper		Level 2	$	4,687	$	1	$	0		$	4,688	$	1,618	$	3,070	$	0
Certificates of deposit		Level 2		2,898		0		0			2,898		1,646		1,252		0
U.S. government securities		Level 1		92,067		6,495		(1	)		98,561		3,168		95,393		0
U.S. agency securities		Level 2		2,439		2		0			2,441		449		1,992		0
Foreign government bonds		Level 2		6,982		6		(3	)		6,985		1		6,984		0
Mortgage- and asset-backed securities		Level 2		4,865		41		(6	)		4,900		0		4,900		0
Corporate notes and bonds		Level 2		8,500		327		(17	)		8,810		0		8,810		0
Corporate notes and bonds		Level 3		58		0		0			58		0		58		0
Municipal securities		Level 2		313		57		(4	)		366		0		366		0
Municipal securities		Level 3		91		0		0			91		0		91		0


Total debt investments			$	122,900	$	6,929	$	(31	)	$	129,798	$	6,882	$	122,916	$	0


Changes in Fair Value Recorded in Net Income

Equity investments		Level 1								$	1,198	$	784	$	0	$	414
Equity investments		Other									2,551		0		0		2,551


Total equity investments										$	3,749	$	784	$	0	$	2,965


Cash										$	5,910	$	5,910	$	0	$	0
Derivatives, net^(a)											35		0		35		0


Total										$	139,492	$	13,576	$	122,951	$	2,965

(a)	Refer to Note 5 – Derivatives for further information on the fair value of our derivative instruments.

Equity investments presented as “Other” in the tables above include investments without readily determinable fair values measured using the equity method or measured at cost with adjustments for observable changes in price or impairments, and investments measured at fair value using net asset value as a practical expedient which are not categorized in the fair value hierarchy. As of June 30, 2021 and 2020, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $3.3 billion and $1.4 billion, respectively.

Unrealized Losses on Debt Investments

Debt investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows:

	Less than 12 Months					12 Months or Greater							Total Unrealized Losses


(In millions)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Total Fair Value


June 30, 2021

U.S. government and agency securities	$	5,294	$	(111	)	$	0	$	0		$	5,294	$	(111	)
Foreign government bonds		3,148		(1	)		5		(1	)		3,153		(2	)
Mortgage- and asset-backed securities		1,211		(5	)		87		(1	)		1,298		(6	)
Corporate notes and bonds		1,678		(8	)		34		(1	)		1,712		(9	)
Municipal securities		58		(7	)		1		0			59		(7	)


Total	$	11,389	$	(132	)	$	127	$	(3	)	$	11,516	$	(135	)

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Item 8

	Less than 12 Months					12 Months or Greater						Total Unrealized Losses


(In millions)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Total Fair Value


June 30, 2020

U.S. government and agency securities	$	2,323	$	(1	)	$	0	$	0	$	2,323	$	(1	)
Foreign government bonds		500		(3	)		0		0		500		(3	)
Mortgage- and asset-backed securities		1,014		(6	)		0		0		1,014		(6	)
Corporate notes and bonds		649		(17	)		0		0		649		(17	)
Municipal securities		66		(4	)		0		0		66		(4	)


Total	$	4,552	$	(31	)	$	0	$	0	$	4,552	$	(31	)

Debt Investment Maturities

(In millions)	Adjusted Cost Basis		Estimated Fair Value


June 30, 2021

Due in one year or less	$	22,612	$	22,676
Due after one year through five years		67,541		70,315
Due after five years through 10 years		25,212		26,327
Due after 10 years		2,601		2,690


Total	$	117,966	$	122,008

NOTE 5 — DERIVATIVES

Foreign Currencies

In the past, option and forward contracts were used to hedge a portion of forecasted international revenue and were designated as cash flow hedging instruments. Principal currencies hedged included the Euro, Japanese yen, British pound, Canadian dollar, and Australian dollar.

Interest Rate

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Item 8

Equity

Credit

Credit-Risk-Related Contingent Features

Certain of our counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the standard convention related to over-the-counter derivatives. As of June 30, 2021, our long-term unsecured debt rating was AAA, and cash investments were in excess of $1.0 billion. As a result, no collateral was required to be posted.

The following table presents the notional amounts of our outstanding derivative instruments measured in U.S. dollar equivalents:

(In millions)	June 30, 2021		June 30, 2020


Designated as Hedging Instruments

Foreign exchange contracts purchased	$	635	$	635
Foreign exchange contracts sold		6,081		6,754
Interest rate contracts purchased		1,247		1,295

Not Designated as Hedging Instruments

Foreign exchange contracts purchased		14,223		11,896
Foreign exchange contracts sold		23,391		15,595
Other contracts purchased		2,456		1,844
Other contracts sold		763		757

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Item 8

Fair Values of Derivative Instruments

The following table presents our derivative instruments:

	Derivative			Derivative				Derivative				Derivative
(In millions)	Assets			Liabilities				Assets				Liabilities


	June 30, 2021							June 30, 2020

Designated as Hedging Instruments

Foreign exchange contracts	$	76			$	(8	)		$	44			$	(54	)
Interest rate contracts		40				0				93				0

Not Designated as Hedging Instruments

Foreign exchange contracts		227				(291	)			245				(334	)
Other contracts		56				(36	)			18				(11	)


Gross amounts of derivatives		399				(335	)			400				(399	)
Gross amounts of derivatives offset in the balance sheet		(141	)			142				(154	)			158
Cash collateral received		0				(42	)			0				(154	)


Net amounts of derivatives	$	258			$	(235	)		$	246			$	(395	)


Reported as

Short-term investments	$	78			$	0			$	35			$	0
Other current assets		137				0				199				0
Other long-term assets		43				0				12				0
Other current liabilities		0				(182	)			0				(334	)
Other long-term liabilities		0				(53	)			0				(61	)


Total	$	258			$	(235	)		$	246			$	(395	)

Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $395 million and $335 million, respectively, as of June 30, 2021, and $399 million and $399 million, respectively, as of June 30, 2020.

The following table presents the fair value of our derivatives instruments on a gross basis:

(In millions)	Level 1			Level 2		Level 3		Total


June 30, 2021

Derivative assets	$	0	$	396		$	3	$	399
Derivative liabilities		0		(335	)		0		(335	)

June 30, 2020

Derivative assets		1		398			1		400
Derivative liabilities		0		(399	)		0		(399	)

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Gains (losses) on derivative instruments recognized in our consolidated income statements were as follows:

(In millions)


Year Ended June 30,	2021					2020					2019

	Revenue		Other Income (Expense), Net				Revenue		Other Income (Expense), Net			Revenue			Other Income (Expense), Net


Designated as Fair Value Hedging Instruments

Foreign exchange contracts
Derivatives	$	0	$	193			$	0	$	1		$	0		$	(130	)
Hedged items		0		(188	)			0		3			0			130
Excluded from effectiveness assessment		0		30				0		139			0			168
Interest rate contracts
Derivatives		0		(37	)			0		93			0			0
Hedged items		0		53				0		(93	)		0			0

Designated as Cash Flow Hedging Instruments

Foreign exchange contracts
Amount reclassified from accumulated other comprehensive income		0		17				0		0			341			0
Excluded from effectiveness assessment		0		0				0		0			(64	)		0

Not Designated as Hedging Instruments

Foreign exchange contracts		0		27				0		(123	)		0			(97	)
Other contracts		0		9				0		50			0			38

Gains (losses), net of tax, on derivative instruments recognized in our consolidated comprehensive income statements were as follows:

(In millions)


Year Ended June 30,	2021		2020			2019

Designated as Cash Flow Hedging Instruments

Foreign exchange contracts
Included in effectiveness assessment	$	34	$	(38	)	$	159

NOTE 6 — INVENTORIES

The components of inventories were as follows:

(In millions)


June 30,	2021		2020

Raw materials	$	1,190	$	700
Work in process		79		83
Finished goods		1,367		1,112


Total	$	2,636	$	1,895

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NOTE 7 — PROPERTY AND EQUIPMENT

The components of property and equipment were as follows:

(In millions)


June 30,	2021			2020

Land	$	3,660		$	1,823
Buildings and improvements		43,928			33,995
Leasehold improvements		6,884			5,487
Computer equipment and software		51,250			41,261
Furniture and equipment		5,344			4,782


Total, at cost		111,066			87,348
Accumulated depreciation		(51,351	)		(43,197	)


Total, net	$	59,715		$	44,151

During fiscal years 2021, 2020, and 2019, depreciation expense was $9.3 billion, $10.7 billion, and $9.7 billion, respectively. Depreciation expense declined in fiscal year 2021 due to the change in estimated useful lives of our server and network equipment. We have committed $9.5 billion for the construction of new buildings, building improvements, and leasehold improvements as of June 30, 2021.

During fiscal year 2020, we recorded an impairment charge of $186 million to Property and Equipment, primarily to leasehold improvements, due to the closing of our Microsoft Store physical locations.

NOTE 8 — BUSINESS COMBINATIONS

ZeniMax Media Inc.

On March 9, 2021, we completed our acquisition of ZeniMax Media Inc. (“ZeniMax”), the parent company of Bethesda Softworks LLC (“Bethesda”), for a total purchase price of $8.1 billion, consisting primarily of cash. The purchase price included $768 million of cash and cash equivalents acquired. Bethesda is one of the largest, privately held game developers and publishers in the world, and brings a broad portfolio of games, technology, and talent to Xbox. The financial results of ZeniMax have been included in our consolidated financial statements since the date of the acquisition. ZeniMax is reported as part of our More Personal Computing segment.

The major classes of assets and liabilities to which we have preliminarily allocated the purchase price were as follows:

(In millions)


Cash and cash equivalents	$	768
Goodwill		5,469
Intangible assets		1,968
Other assets		139
Other liabilities		(223	)


Total	$	8,121

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Item 8

Following are details of the purchase price allocated to the intangible assets acquired:

(In millions)	Amount		Weighted Average Life


Technology-based	$	1,341		4 years
Marketing-related		627		11 years


Total	$	1,968		6 years

GitHub, Inc.

On October 25, 2018, we acquired GitHub, Inc. (“GitHub”), a software development platform, in a $7.5 billion stock transaction (inclusive of total cash payments of $1.3 billion in respect of vested GitHub equity awards and an indemnity escrow). The acquisition is expected to empower developers to achieve more at every stage of the development lifecycle, accelerate enterprise use of GitHub, and bring Microsoft’s developer tools and services to new audiences. The financial results of GitHub have been included in our consolidated financial statements since the date of the acquisition. GitHub is reported as part of our Intelligent Cloud segment.

The allocation of the purchase price to goodwill was completed as of June 30, 2019. The major classes of assets and liabilities to which we allocated the purchase price were as follows:

(In millions)


Cash, cash equivalents, and short-term investments	$	234
Goodwill		5,497
Intangible assets		1,267
Other assets		143
Other liabilities		(217	)


Total	$	6,924

The goodwill recognized in connection with the acquisition is primarily attributable to anticipated synergies from future growth and is not expected to be deductible for tax purposes. We assigned the goodwill to our Intelligent Cloud segment.

Following are the details of the purchase price allocated to the intangible assets acquired:

(In millions)	Amount		Weighted Average Life


Customer-related	$	648		8 years
Technology-based		447		5 years
Marketing-related		170		10 years
Contract-based		2		2 years


Total	$	1,267		7 years

Transactions recognized separately from the purchase price allocation were approximately $600 million, primarily related to equity awards recognized as expense over the related service period.

Nuance Communications, Inc.

On April 11, 2021, we entered into a definitive agreement to acquire Nuance Communications, Inc. (“Nuance”) for $56.00 per share in an all-cash transaction valued at $19.7 billion, inclusive of Nuance’s net debt. Nuance is a cloud and artificial intelligence (“AI”) software provider with healthcare and enterprise AI experience, and the acquisition will build on our industry-specific cloud offerings. The acquisition has been approved by Nuance’s shareholders, and we expect it to close by the end of calendar year 2021, subject to the satisfaction of certain regulatory approvals and other customary closing conditions.

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NOTE 9 — GOODWILL

Changes in the carrying amount of goodwill were as follows:

(In millions)		June 30, 2019		Acquisitions		Other			June 30, 2020		Acquisitions			Other			June 30, 2021


Productivity and Business Processes	$	24,277	$	7	$	(94	)	$	24,190	$	0		$	127		$	24,317
Intelligent Cloud		11,351		1,351		(5	)		12,697		505			54			13,256
More Personal Computing		6,398		96		(30	)		6,464		5,556	^(a)		118	^(a⁾		12,138


Total	$	42,026	$	1,454	$	(129	)	$	43,351	$	6,061		$	299		$	49,711

(a)	Includes goodwill of $5.5 billion related to ZeniMax. See Note 8 – Business Combinations for further information.

Goodwill Impairment

No instances of impairment were identified in our May 1, 2021, May 1, 2020, or May 1, 2019 tests. As of June 30, 2021 and 2020, accumulated goodwill impairment was $11.3 billion.

NOTE 10 — INTANGIBLE ASSETS

The components of intangible assets, all of which are finite-lived, were as follows:

(In millions)	Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount


June 30,							2021							2020

Technology-based	$	9,779		$	(7,007	)	$	2,772	$	8,160	$	(6,381	)	$	1,779
Customer-related		4,958			(2,859	)		2,099		4,967		(2,320	)		2,647
Marketing-related		4,792			(1,878	)		2,914		4,158		(1,588	)		2,570
Contract-based		446			(431	)		15		474		(432	)		42


Total	$	19,975	^(a)	$	(12,175	)	$	7,800	$	17,759	$	(10,721	)	$	7,038

(a)	Includes intangible assets of $2.0 billion related to ZeniMax. See Note 8 – Business Combinations for further information.

No material impairments of intangible assets were identified during fiscal years 2021, 2020, or 2019. We estimate that we have no significant residual value related to our intangible assets.

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Item 8

The components of intangible assets acquired during the periods presented were as follows:

(In millions)	Amount		Weighted Average Life		Amount		Weighted Average Life


Year Ended June 30,	2021				2020

Technology-based	$	1,628		4 years	$	531		6 years
Customer-related		96		4 years		303		5 years
Marketing-related		625		6 years		2		2 years
Contract-based		10		3 years		0		0 years


Total	$	2,359		5 years	$	836		5 years

Intangible assets amortization expense was $1.6 billion, $1.6 billion, and $1.9 billion for fiscal years 2021, 2020, and 2019, respectively.

The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2021:

(In millions)


Year Ending June 30,

2022	$	1,683
2023		1,722
2024		1,415
2025		755
2026		498
Thereafter		1,727


Total	$	7,800

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Item 8

NOTE 11 — DEBT

The components of debt were as follows:

(In millions, issuance by calendar year)	Maturities (calendar year)				Stated Interest Rate				Effective Interest Rate			June 30, 2021				June 30, 2020


2009 issuance of $3.8 billion ^(a)				2039				5.20%			5.24%		$	520		$	559
2010 issuance of $4.8 billion ^(a)				2040				4.50%			4.57%			486			1,571
2011 issuance of $2.3 billion ^(a)				2041				5.30%			5.36%			718			1,270
2012 issuance of $2.3 billion ^(a)		2022	–	2042		2.13%	–	3.50%	2.24%	–	3.57%			1,204			1,650
2013 issuance of $5.2 billion ^(a)		2023	–	2043		2.38%	–	4.88%	2.47%	–	4.92%			2,814			2,919
2013 issuance of €4.1 billion		2021	–	2033		2.13%	–	3.13%	2.23%	–	3.22%			4,803			4,549
2015 issuance of $23.8 billion ^(a)		2022	–	2055		2.38%	–	4.75%	2.47%	–	4.78%			12,305			15,549
2016 issuance of $19.8 billion ^(a)		2021	–	2056		1.55%	–	3.95%	1.64%	–	4.03%			12,180			16,955
2017 issuance of $17.0 billion ^(a)		2022	–	2057		2.40%	–	4.50%	2.52%	–	4.53%			10,695			12,385
2020 issuance of $10.0 billion ^(a)		2050	–	2060		2.53%	–	2.68%	2.53%	–	2.68%			10,000			10,000
2021 issuance of $8.2 billion ^(a)		2052	–	2062		2.92%	–	3.04%	2.92%	–	3.04%			8,185			0


Total face value														63,910			67,407
Unamortized discount and issuance costs														(511	)		(554	)
Hedge fair value adjustments ⁽^b⁾														40			93
Premium on debt exchange ^(a)														(5,293	)		(3,619	)


Total debt														58,146			63,327
Current portion of long-term debt														(8,072	)		(3,749	)


Long-term debt													$	50,074		$	59,578

(a)	In March 2021 and June 2020, we exchanged a portion of our existing debt at a premium for cash and new debt with longer maturities. The premiums are amortized over the terms of the new debt.

(b)	Refer to Note 5 – Derivatives for further information on the interest rate swaps related to fixed-rate debt.

As of June 30, 2021 and 2020, the estimated fair value of long-term debt, including the current portion, was $70.0 billion and $77.1 billion, respectively. The estimated fair values are based on Level 2 inputs.

Debt in the table above is comprised of senior unsecured obligations and ranks equally with our other outstanding obligations. Interest is paid semi-annually, except for the Euro-denominated debt, which is paid annually. Cash paid for interest on our debt for fiscal years 2021, 2020, and 2019 was $2.0 billion, $2.4 billion, and $2.4 billion, respectively.

The following table outlines maturities of our long-term debt, including the current portion, as of June 30, 2021:

(In millions)


Year Ending June 30,

2022	$	8,075
2023		2,750
2024		5,250
2025		2,250
2026		3,000
Thereafter		42,585


Total	$	63,910

PART II

Item 8

NOTE 12 — INCOME TAXES

Tax Cuts and Jobs Act

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law, which significantly changed existing U.S. tax law and included numerous provisions that affect our business. We recorded a provisional net charge of $13.7 billion related to the enactment of the TCJA in fiscal year 2018 and adjusted the provisional net charge by recording additional tax expense of $157 million in fiscal year 2019 pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 118.

In fiscal year 2019, in response to the TCJA and recently issued regulations, we transferred certain intangible properties held by our foreign subsidiaries to the U.S. and Ireland. The transfers of intangible properties resulted in a $2.6 billion net income tax benefit recorded in the fourth quarter of fiscal year 2019, as the value of future tax deductions exceeded the current tax liability from foreign jurisdictions and U.S. global intangible low-taxed income (“GILTI”) tax.

Provision for Income Taxes

The components of the provision for income taxes were as follows:

(In millions)


Year Ended June 30,	2021			2020			2019

Current Taxes

U.S. federal	$	3,285		$	3,537		$	4,718
U.S. state and local		1,229			763			662
Foreign		5,467			4,444			5,531


Current taxes	$	9,981		$	8,744		$	10,911

Deferred Taxes

U.S. federal	$	25		$	58		$	(5,647	)
U.S. state and local		(204	)		(6	)		(1,010	)
Foreign		29			(41	)		194


Deferred taxes	$	(150	)	$	11		$	(6,463	)


Provision for income taxes	$	9,831		$	8,755		$	4,448

U.S. and foreign components of income before income taxes were as follows:

(In millions)


Year Ended June 30,	2021		2020		2019

U.S.	$	34,972	$	24,116	$	15,799
Foreign		36,130		28,920		27,889


Income before income taxes	$	71,102	$	53,036	$	43,688

PART II

Item 8

Effective Tax Rate

The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows:



Year Ended June 30,	2021		2020		2019

Federal statutory rate		21.0%		21.0%		21.0%
Effect of:
Foreign earnings taxed at lower rates		(2.7)%		(3.7)%		(4.1)%
Impact of the enactment of the TCJA		0%		0%		0.4%
Impact of intangible property transfers		0%		0%		(5.9)%
Foreign-derived intangible income deduction		(1.3)%		(1.1)%		(1.4)%
State income taxes, net of federal benefit		1.4%		1.3%		0.7%
Research and development credit		(0.9)%		(1.1)%		(1.1)%
Excess tax benefits relating to stock-based compensation		(2.4)%		(2.2)%		(2.2)%
Interest, net		0.5%		1.0%		1.0%
Other reconciling items, net		(1.8)%		1.3%		1.8%


Effective rate		13.8%		16.5%		10.2%

The decrease from the federal statutory rate in fiscal year 2021 is primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland and Puerto Rico, tax benefits relating to stock-based compensation, and tax benefits from the India Supreme Court decision on withholding taxes. The decrease from the federal statutory rate in fiscal year 2020 is primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland and Puerto Rico, and tax benefits relating to stock-based compensation. The decrease from the federal statutory rate in fiscal year 2019 is primarily due to a $2.6 billion net income tax benefit related to intangible property transfers, and earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland, Singapore, and Puerto Rico. In fiscal year 2021 and 2020, our foreign regional operating centers in Ireland and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated 82% and 86% of our foreign income before tax. In fiscal years 2019, our foreign regional operating centers in Ireland, Singapore, and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated 82% of our foreign income before tax, respectively. Other reconciling items, net consists primarily of tax credits and GILTI tax, and in fiscal year 2021, includes tax benefits from the India Supreme Court decision on withholding taxes. In fiscal years 2021, 2020, and 2019, there were no individually significant other reconciling items.

PART II

Item 8

The decrease in our effective tax rate for fiscal year 2021 compared to fiscal year 2020 was primarily due to tax benefits from the India Supreme Court decision on withholding taxes, an agreement between the U.S. and India tax authorities related to transfer pricing, final TCJA regulations, and an increase in tax benefits relating to stock-based compensation. The increase in our effective tax rate for fiscal year 2020 compared to fiscal year 2019 was primarily due to a $2.6 billion net income tax benefit in the fourth quarter of fiscal year 2019 related to intangible property transfers.

The components of the deferred income tax assets and liabilities were as follows:

(In millions)


June 30,	2021			2020

Deferred Income Tax Assets

Stock-based compensation expense	$	502		$	461
Accruals, reserves, and other expenses		2,960			2,721
Loss and credit carryforwards		1,090			865
Amortization		6,346			6,737
Leasing liabilities		4,060			3,025
Unearned revenue		2,659			1,553
Other		543			354


Deferred income tax assets		18,160			15,716
Less valuation allowance		(769	)		(755	)


Deferred income tax assets, net of valuation allowance	$	17,391		$	14,961


Deferred Income Tax Liabilities

Book/tax basis differences in investments and debt	$	(2,605	)	$	(2,642	)
Leasing assets		(3,834	)		(2,817	)
Depreciation		(1,010	)		(376	)
Deferred GILTI tax liabilities		(2,815	)		(2,581	)
Other		(144	)		(344	)


Deferred income tax liabilities	$	(10,408	)	$	(8,760	)


Net deferred income tax assets	$	6,983		$	6,201


Reported As

Other long-term assets	$	7,181		$	6,405
Long-term deferred income tax liabilities		(198	)		(204	)


Net deferred income tax assets	$	6,983		$	6,201

As of June 30, 2021, we had federal, state, and foreign net operating loss carryforwards of $304 million, $1.3 billion, and $2.0 billion, respectively. The federal and state net operating loss carryforwards will expire in various years from fiscal 2022 through 2041, if not utilized. The majority of our foreign net operating loss carryforwards do not expire. Certain acquired net operating loss carryforwards are subject to an annual limitation but are expected to be realized with the exception of those which have a valuation allowance.

The valuation allowance disclosed in the table above relates to the foreign net operating loss carryforwards and other net deferred tax assets that may not be realized. In fiscal year 2020, we removed $2.0 billion of foreign net operating losses and corresponding valuation allowances as a result of the liquidation of a foreign subsidiary. There was no impact to our consolidated financial statements.

Income taxes paid, net of refunds, were $13.4 billion, $12.5 billion, and $8.4 billion in fiscal years 2021, 2020, and 2019, respectively.

PART II

Item 8

Uncertain Tax Positions

Gross unrecognized tax benefits related to uncertain tax positions as of June 30, 2021, 2020, and 2019, were $14.6 billion, $13.8 billion, and $13.1 billion, respectively, which were primarily included in long-term income taxes in our consolidated balance sheets. If recognized, the resulting tax benefit would affect our effective tax rates for fiscal years 2021, 2020, and 2019 by $12.5 billion, $12.1 billion, and $12.0 billion, respectively.

As of June 30, 2021, 2020, and 2019, we had accrued interest expense related to uncertain tax positions of $4.3 billion, $4.0 billion, and $3.4 billion, respectively, net of income tax benefits. The provision for income taxes for fiscal years 2021, 2020, and 2019 included interest expense related to uncertain tax positions of $274 million, $579 million, and $515 million, respectively, net of income tax benefits.

The aggregate changes in the gross unrecognized tax benefits related to uncertain tax positions were as follows:

(In millions)


Year Ended June 30,	2021			2020			2019

Beginning unrecognized tax benefits	$	13,792		$	13,146		$	11,961
Decreases related to settlements		(195	)		(31	)		(316	)
Increases for tax positions related to the current year		790			647			2,106
Increases for tax positions related to prior years		461			366			508
Decreases for tax positions related to prior years		(297	)		(331	)		(1,113	)
Decreases due to lapsed statutes of limitations		(1	)		(5	)		0


Ending unrecognized tax benefits	$	14,550		$	13,792		$	13,146

As of June 30, 2021, the primary unresolved issues for the IRS audits relate to transfer pricing, which could have a material impact in our consolidated financial statements when the matters are resolved. We believe our allowances for income tax contingencies are adequate. We have not received a proposed assessment for the unresolved key transfer pricing issues and do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months.

We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years 1996 to 2020, some of which are currently under audit by local tax authorities. The resolution of each of these audits is not expected to be material to our consolidated financial statements.

NOTE 13 — UNEARNED REVENUE

Unearned revenue by segment was as follows:

(In millions)


June 30,	2021		2020

Productivity and Business Processes	$	22,120	$	18,643
Intelligent Cloud		17,710		16,620
More Personal Computing		4,311		3,917


Total	$	44,141	$	39,180

PART II

Item 8

Changes in unearned revenue were as follows:

(In millions)


Year Ended June 30, 2021

Balance, beginning of period	$	39,180
Deferral of revenue		94,565
Recognition of unearned revenue		(89,604	)


Balance, end of period	$	44,141

Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $146 billion as of June 30, 2021, of which $141 billion is related to the commercial portion of revenue. We expect to recognize approximately 50% of this revenue over the next 12 months and the remainder thereafter.

NOTE 14 — LEASES

We have operating and finance leases for datacenters, corporate offices, research and development facilities, Microsoft Experience Centers, and certain equipment. Our leases have remaining lease terms of 1 year to 15 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year.

The components of lease expense were as follows:

(In millions)


Year Ended June 30,	2021			2020		2019

Operating lease cost	$	2,127	$	2,043	$	1,707


Finance lease cost:
Amortization of right-of-use assets	$	921	$	611	$	370
Interest on lease liabilities		386		336		247


Total finance lease cost	$	1,307	$	947	$	617

Supplemental cash flow information related to leases was as follows:

(In millions)


Year Ended June 30,	2021			2020		2019

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	2,052	$	1,829	$	1,670
Operating cash flows from finance leases		386		336		247
Financing cash flows from finance leases		648		409		221

Right-of-use assets obtained in exchange for lease obligations:
Operating leases		4,380		3,677		2,303
Finance leases		3,290		3,467		2,532

PART II

Item 8

Supplemental balance sheet information related to leases was as follows:

(In millions, except lease term and discount rate)


June 30,	2021			2020

Operating Leases

Operating lease right-of-use assets	$	11,088		$	8,753


Other current liabilities	$	1,962		$	1,616
Operating lease liabilities		9,629			7,671


Total operating lease liabilities	$	11,591		$	9,287


Finance Leases

Property and equipment, at cost	$	14,107		$	10,371
Accumulated depreciation		(2,306	)		(1,385	)


Property and equipment, net	$	11,801		$	8,986


Other current liabilities	$	791		$	540
Other long-term liabilities		11,750			8,956


Total finance lease liabilities	$	12,541		$	9,496


Weighted Average Remaining Lease Term

Operating leases		8 years			8 years
Finance leases		12 years			13 years

Weighted Average Discount Rate

Operating leases		2.2%			2.7%
Finance leases		3.4%			3.9%

The following table outlines maturities of our lease liabilities as of June 30, 2021:

(In millions)


Year Ending June 30,	Operating Leases			Finance Leases

2022	$	2,125		$	1,179
2023		1,954			1,198
2024		1,751			1,211
2025		1,463			1,537
2026		1,133			1,220
Thereafter		4,111			8,856


Total lease payments		12,537			15,201
Less imputed interest		(946	)		(2,660	)


Total	$	11,591		$	12,541

As of June 30, 2021, we have additional operating and finance leases, primarily for datacenters, that have not yet commenced of $5.4 billion and $7.3 billion, respectively. These operating and finance leases will commence between fiscal year 2022 and fiscal year 2026 with lease terms of 1 year to 15 years.

During fiscal year 2020, we recorded an impairment charge of $161 million to operating lease right-of-use assets due to the closing of our Microsoft Store physical locations.

PART II

Item 8

NOTE 15 — CONTINGENCIES

Patent and Intellectual Property Claims

There were 63 patent infringement cases pending against Microsoft as of June 30, 2021, none of which are material individually or in aggregate.

Antitrust, Unfair Competition, and Overcharge Class Actions

Antitrust and unfair competition class action lawsuits were filed against us in British Columbia, Ontario, and Quebec, Canada. All three have been certified on behalf of Canadian indirect purchasers who acquired licenses for Microsoft operating system software and/or productivity application software between 1998 and 2010.

The trial of the British Columbia action commenced in May 2016. Following a mediation, the parties agreed to a global settlement of all three Canadian actions and submitted the proposed settlement agreement to the courts in all three jurisdictions for approval. The final settlement and form of notice have been approved by the courts in British Columbia, Ontario, and Quebec. The ten-month claims period commenced on November 23, 2020 and will close on September 23, 2021.

Other Antitrust Litigation and Claims

China State Administration for Market Regulation Investigation

Product-Related Litigation

U.S. Cell Phone Litigation

PART II

Item 8

Other Contingencies

As of June 30, 2021, we accrued aggregate legal liabilities of $339 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $500 million in aggregate beyond recorded amounts are reasonably possible. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact in our consolidated financial statements for the period in which the effects become reasonably estimable.

NOTE 16 — STOCKHOLDERS’ EQUITY

Shares Outstanding

Shares of common stock outstanding were as follows:

(In millions)


Year Ended June 30,	2021			2020			2019

Balance, beginning of year		7,571			7,643			7,677
Issued		49			54			116
Repurchased		(101	)		(126	)		(150	)


Balance, end of year		7,519			7,571			7,643

Share Repurchases

On September 18, 2019, our Board of Directors approved a share repurchase program authorizing up to $40.0 billion in share repurchases. This share repurchase program commenced in February 2020, following completion of the program approved on September 20, 2016, has no expiration date, and may be terminated at any time. As of June 30, 2021, $8.7 billion remained of this $40.0 billion share repurchase program.

PART II

Item 8

We repurchased the following shares of common stock under the share repurchase programs:

(In millions)	Shares		Amount		Shares		Amount		Shares		Amount


Year Ended June 30,	2021				2020				2019

First Quarter		25	$	5,270		29	$	4,000		24	$	2,600
Second Quarter		27		5,750		32		4,600		57		6,100
Third Quarter		25		5,750		37		6,000		36		3,899
Fourth Quarter		24		6,200		28		5,088		33		4,200


Total		101	$	22,970		126	$	19,688		150	$	16,799

Shares repurchased during fiscal year 2021 and the fourth quarter of fiscal year 2020 were under the share repurchase program approved on September 18, 2019. Shares repurchased during the third quarter of fiscal year 2020 were under the share repurchase programs approved on both September 20, 2016 and September 18, 2019. All other shares repurchased were under the share repurchase program approved on September 20, 2016. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards of $4.4 billion, $3.3 billion, and $2.7 billion for fiscal years 2021, 2020, and 2019, respectively. All share repurchases were made using cash resources.

Dividends

Our Board of Directors declared the following dividends:

Declaration Date	Record Date		Payment Date		Dividend Per Share			Amount


Fiscal Year 2021								(In millions)

September 15, 2020		November 19, 2020		December 10, 2020		$	0.56	$	4,230
December 2, 2020		February 18, 2021		March 11, 2021			0.56		4,221
March 16, 2021		May 20, 2021		June 10, 2021			0.56		4,214
June 16, 2021		August 19, 2021		September 9, 2021			0.56		4,211


Total						$	2.24	$	16,876


Fiscal Year 2020

September 18, 2019		November 21, 2019		December 12, 2019		$	0.51	$	3,886
December 4, 2019		February 20, 2020		March 12, 2020			0.51		3,876
March 9, 2020		May 21, 2020		June 11, 2020			0.51		3,865
June 17, 2020		August 20, 2020		September 10, 2020			0.51		3,856


Total						$	2.04	$	15,483

The dividend declared on June 16, 2021 was included in other current liabilities as of June 30, 2021.

PART II

Item 8

NOTE 17 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes in accumulated other comprehensive income (loss) by component:

(In millions)


Year Ended June 30,	2021			2020			2019

Derivatives

Balance, beginning of period	$	(38	)	$	0		$	173
Unrealized gains (losses), net of tax of $9, $(10), and $2		34			(38	)		160
Reclassification adjustments for gains included in earnings		(17	)		0			(341	)
Tax expense included in provision for income taxes		2			0			8


Amounts reclassified from accumulated other comprehensive income (loss)		(15	)		0			(333	)


Net change related to derivatives, net of tax of $7, $(10), and $(6)		19			(38	)		(173	)


Balance, end of period	$	(19	)	$	(38	)	$	0


Investments

Balance, beginning of period	$	5,478		$	1,488		$	(850	)
Unrealized gains (losses), net of tax of $(589), $1,057, and $616		(2,216	)		3,987			2,331
Reclassification adjustments for (gains) losses included in other income (expense), net		(63	)		4			93
Tax expense (benefit) included in provision for income taxes		13			(1	)		(19	)


Amounts reclassified from accumulated other comprehensive income (loss)		(50	)		3			74


Net change related to investments, net of tax of $(602), $1,058, and $635		(2,266	)		3,990			2,405
Cumulative effect of accounting changes		10			0			(67	)


Balance, end of period	$	3,222		$	5,478		$	1,488


Translation Adjustments and Other

Balance, beginning of period	$	(2,254	)	$	(1,828	)	$	(1,510	)
Translation adjustments and other, net of tax effects of $(9), $1, and $(1)		873			(426	)		(318	)


Balance, end of period	$	(1,381	)	$	(2,254	)	$	(1,828	)


Accumulated other comprehensive income (loss), end of period	$	1,822		$	3,186		$	(340	)

NOTE 18 — EMPLOYEE STOCK AND SAVINGS PLANS

We grant stock-based compensation to employees and directors. As of June 30, 2021, an aggregate of 251 million shares were authorized for future grant under our stock plans. Awards that expire or are canceled without delivery of shares generally become available for issuance under the plans. We issue new shares of Microsoft common stock to satisfy vesting of awards granted under our stock plans. We also have an ESPP for all eligible employees.

Stock-based compensation expense and related income tax benefits were as follows:

(In millions)


Year Ended June 30,	2021		2020		2019

Stock-based compensation expense	$	6,118	$	5,289	$	4,652
Income tax benefits related to stock-based compensation		1,065		938		816

Stock Plans

Stock awards entitle the holder to receive shares of Microsoft common stock as the award vests. Stock awards generally vest over a service period of four years or five years.

PART II

Item 8

Executive Incentive Plan

Activity for All Stock Plans

The fair value of stock awards was estimated on the date of grant using the following assumptions:



Year ended June 30,				2021				2020				2019



Dividends per share (quarterly amounts)	$	0.51	–	0.56	$	0.46	–	0.51	$	0.42	–	0.46
Interest rates		0.01%	–	1.5%		0.1%	–	2.2%		1.8%	–	3.1%

During fiscal year 2021, the following activity occurred under our stock plans:

Shares			Weighted Average Grant-Date Fair Value


(In millions)

Stock Awards

Nonvested balance, beginning of year	126		$	105.23
Granted ^(a)	40			221.13
Vested	(58	)		99.41
Forfeited	(8	)		129.92


Nonvested balance, end of year	100		$	152.51

(a)	Includes 2 million of PSUs granted at target and performance adjustments above target levels for fiscal years 2021, 2020, and 2019.

As of June 30, 2021, there was approximately $12.0 billion of total unrecognized compensation costs related to stock awards. These costs are expected to be recognized over a weighted average period of three years. The weighted average grant-date fair value of stock awards granted was $221.13, $140.49, and $107.02 for fiscal years 2021, 2020, and 2019, respectively. The fair value of stock awards vested was $13.4 billion, $10.1 billion, and $8.7 billion, for fiscal years 2021, 2020, and 2019, respectively.

Employee Stock Purchase Plan

We have an ESPP for all eligible employees. Shares of our common stock may be purchased by employees at three-month intervals at 90% of the fair market value on the last trading day of each three-month period. Employees may purchase shares having a value not exceeding 15% of their gross compensation during an offering period. Under the terms of the ESPP that were approved in 2012, the plan will terminate on December 31, 2022. We intend to request shareholder approval for a successor ESPP with a January 1, 2022 effective date and ten-year expiration of December 31, 2031 at our 2021 Annual Shareholders Meeting. No additional shares will be requested at this meeting. Employees purchased the following shares during the periods presented:

(Shares in millions)


Year Ended June 30,	2021		2020		2019

Shares purchased		8		9		11
Average price per share	$	207.88	$	142.22	$	104.85

As of June 30, 2021, 88 million shares of our common stock were reserved for future issuance through the ESPP.

PART II

Item 8

Savings Plan

We have savings plans in the U.S. that qualify under Section 401(k) of the Internal Revenue Code, and a number of savings plans in international locations. Eligible U.S. employees may contribute a portion of their salary into the savings plans, subject to certain limitations. We contribute fifty cents for each dollar a participant contributes into the plans, with a maximum employer contribution of 50% of the IRS contribution limit for the calendar year. Employer-funded retirement benefits for all plans were $1.2 billion, $1.0 billion, and $877 million in fiscal years 2021, 2020, and 2019, respectively, and were expensed as contributed.

NOTE 19 — SEGMENT INFORMATION AND GEOGRAPHIC DATA

Our reportable segments are described below.

Productivity and Business Processes

•

Office Consumer, including Microsoft 365 Consumer subscriptions and Office licensed on-premises, and Office Consumer Services, including Skype, Outlook.com, and OneDrive.

•

LinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, Sales Solutions, and Learning Solutions.

•

Intelligent Cloud

Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business and developers. This segment primarily comprises:

•

Server products and cloud services, including Azure; SQL Server, Windows Server, Visual Studio, System Center, and related Client Access Licenses (“CALs”); and GitHub.

•

Enterprise Services, including Premier Support Services and Microsoft Consulting Services.

More Personal Computing

Our More Personal Computing segment consists of products and services that put customers at the center of the experience with our technology. This segment primarily comprises:

•

Devices, including Surface and PC accessories.

PART II

Item 8

•

Gaming, including Xbox hardware and Xbox content and services, comprising digital transactions, Xbox Game Pass and other subscriptions, video games, third-party video game royalties, cloud services, and advertising.

•

Search advertising.

Segment revenue and operating income were as follows during the periods presented:

(In millions)


Year Ended June 30,		2021		2020		2019

Revenue

Productivity and Business Processes	$	53,915	$	46,398	$	41,160
Intelligent Cloud		60,080		48,366		38,985
More Personal Computing		54,093		48,251		45,698


Total	$	168,088	$	143,015	$	125,843


Operating Income

Productivity and Business Processes	$	24,351	$	18,724	$	16,219
Intelligent Cloud		26,126		18,324		13,920
More Personal Computing		19,439		15,911		12,820


Total	$	69,916	$	52,959	$	42,959

No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for fiscal years 2021, 2020, or 2019. Revenue, classified by the major geographic areas in which our customers were located, was as follows:

(In millions)


Year Ended June 30,	2021		2020		2019

United States ^(a)	$	83,953	$	73,160	$	64,199
Other countries		84,135		69,855		61,644


Total	$	168,088	$	143,015	$	125,843

(a)	Includes billings to OEMs and certain multinational organizations because of the nature of these businesses and the impracticability of determining the geographic source of the revenue.

PART II

Item 8

Revenue from external customers, classified by significant product and service offerings, was as follows:

(In millions)


Year Ended June 30,	2021		2020		2019

Server products and cloud services	$	52,589	$	41,379	$	32,622
Office products and cloud services		39,872		35,316		31,769
Windows		23,227		22,294		20,395
Gaming		15,370		11,575		11,386
LinkedIn		10,289		8,077		6,754
Search advertising		8,528		7,740		7,628
Enterprise Services		6,943		6,409		6,124
Devices		6,791		6,457		6,095
Other		4,479		3,768		3,070


Total	$	168,088	$	143,015	$	125,843

Our commercial cloud revenue, which includes Azure, Office 365 Commercial, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties, was $69.1 billion, $51.7 billion and $38.1 billion in fiscal years 2021, 2020, and 2019, respectively. These amounts are primarily included in Server products and cloud services, Office products and cloud services, and LinkedIn in the table above.

(In millions)


June 30,	2021		2020		2019

United States	$	76,153	$	60,789	$	55,252
Ireland		13,303		12,734		12,958
Other countries		38,858		29,770		25,422


Total	$	128,314	$	103,293	$	93,632

PART II

Item 8

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Microsoft Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the "Company") as of June 30, 2021 and 2020, the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity, for each of the three years in the period ended June 30, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2021, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 29, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

Critical Audit Matters

PART II

Item 8

Revenue Recognition – Refer to Note 1 to the financial statements

Critical Audit Matter Description

Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following:

•

The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation.

•

Identification and treatment of contract terms that may impact the timing and amount of revenue recognized (e.g., variable consideration, optional purchases, and free services).

•

Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately.

How the Critical Audit Matter Was Addressed in the Audit

Our principal audit procedures related to the Company's revenue recognition for these customer agreements included the following:

•

We evaluated management's significant accounting policies related to these customer agreements for reasonableness.

•

We selected a sample of customer agreements and performed the following procedures:

Obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement.

Tested management's identification and treatment of contract terms.

•

We evaluated the reasonableness of management's estimate of stand-alone selling prices for products and services that are not sold separately.

•

We tested the mathematical accuracy of management's calculations of revenue and the associated timing of revenue recognized in the financial statements.

PART II

Item 8

Income Taxes – Uncertain Tax Positions – Refer to Note 12 to the financial statements

Critical Audit Matter Description

How the Critical Audit Matter Was Addressed in the Audit

Our principal audit procedures to evaluate management's estimates of uncertain tax positions related to unresolved transfer pricing issues included the following:

•

We tested the reasonableness of management's judgments regarding the future resolution of the uncertain tax positions, including an evaluation of the technical merits of the uncertain tax positions.

•

We evaluated the reasonableness of management's estimates by considering how tax law, including statutes, regulations and case law, impacted management's judgments.

/s/ DELOITTE & TOUCHE LLP

Seattle, Washington

July 29, 2021

We have served as the Company's auditor since 1983.

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Item 9, 9A

YEAR 2020

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INCOME STATEMENTS

(In millions, except per share amounts)


Year Ended June 30,	2020		2019		2018

Revenue:
Product	$	68,041	$	66,069	$	64,497
Service and other		74,974		59,774		45,863


Total revenue		143,015		125,843		110,360


Cost of revenue:
Product		16,017		16,273		15,420
Service and other		30,061		26,637		22,933


Total cost of revenue		46,078		42,910		38,353


Gross margin		96,937		82,933		72,007
Research and development		19,269		16,876		14,726
Sales and marketing		19,598		18,213		17,469
General and administrative		5,111		4,885		4,754


Operating income		52,959		42,959		35,058
Other income, net		77		729		1,416


Income before income taxes		53,036		43,688		36,474
Provision for income taxes		8,755		4,448		19,903


Net income	$	44,281	$	39,240	$	16,571


Earnings per share:
Basic	$	5.82	$	5.11	$	2.15
Diluted	$	5.76	$	5.06	$	2.13

Weighted average shares outstanding:
Basic		7,610		7,673		7,700
Diluted		7,683		7,753		7,794

Refer to accompanying notes.

PART II

Item 8

COMPREHENSIVE INCOME STATEMENTS

(In millions)


Year Ended June 30,	2020			2019			2018

Net income	$	44,281		$	39,240		$	16,571


Other comprehensive income (loss), net of tax:
Net change related to derivatives		(38	)		(173	)		39
Net change related to investments		3,990			2,405			(2,717	)
Translation adjustments and other		(426	)		(318	)		(178	)


Other comprehensive income (loss)		3,526			1,914			(2,856	)


Comprehensive income	$	47,807		$	41,154		$	13,715

Refer to accompanying notes.

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Item 8

BALANCE SHEETS

(In millions)


June 30,	2020		2019

Assets
Current assets:
Cash and cash equivalents	$	13,576	$	11,356
Short-term investments		122,951		122,463


Total cash, cash equivalents, and short-term investments		136,527		133,819
Accounts receivable, net of allowance for doubtful accounts of $788 and $411		32,011		29,524
Inventories		1,895		2,063
Other current assets		11,482		10,146


Total current assets		181,915		175,552
Property and equipment, net of accumulated depreciation of $43,197 and $35,330		44,151		36,477
Operating lease right-of-use assets		8,753		7,379
Equity investments		2,965		2,649
Goodwill		43,351		42,026
Intangible assets, net		7,038		7,750
Other long-term assets		13,138		14,723


Total assets	$	301,311	$	286,556


Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	12,530	$	9,382
Current portion of long-term debt		3,749		5,516
Accrued compensation		7,874		6,830
Short-term income taxes		2,130		5,665
Short-term unearned revenue		36,000		32,676
Other current liabilities		10,027		9,351


Total current liabilities		72,310		69,420
Long-term debt		59,578		66,662
Long-term income taxes		29,432		29,612
Long-term unearned revenue		3,180		4,530
Deferred income taxes		204		233
Operating lease liabilities		7,671		6,188
Other long-term liabilities		10,632		7,581


Total liabilities		183,007		184,226


Commitments and contingencies
Stockholders’ equity:
Common stock and paid-in capital – shares authorized 24,000; outstanding 7,571 and 7,643		80,552		78,520
Retained earnings		34,566		24,150
Accumulated other comprehensive income (loss)		3,186		(340	)


Total stockholders’ equity		118,304		102,330


Total liabilities and stockholders’ equity	$	301,311	$	286,556

Refer to accompanying notes.

PART II

Item 8

CASH FLOWS STATEMENTS

(In millions)


Year Ended June 30,	2020			2019			2018

Operations
Net income	$	44,281		$	39,240		$	16,571
Adjustments to reconcile net income to net cash from operations:
Depreciation, amortization, and other		12,796			11,682			10,261
Stock-based compensation expense		5,289			4,652			3,940
Net recognized gains on investments and derivatives		(219	)		(792	)		(2,212	)
Deferred income taxes		11			(6,463	)		(5,143	)
Changes in operating assets and liabilities:
Accounts receivable		(2,577	)		(2,812	)		(3,862	)
Inventories		168			597			(465	)
Other current assets		(2,330	)		(1,718	)		(952	)
Other long-term assets		(1,037	)		(1,834	)		(285	)
Accounts payable		3,018			232			1,148
Unearned revenue		2,212			4,462			5,922
Income taxes		(3,631	)		2,929			18,183
Other current liabilities		1,346			1,419			798
Other long-term liabilities		1,348			591			(20	)


Net cash from operations		60,675			52,185			43,884


Financing
Repayments of short-term debt, maturities of 90 days or less, net		0			0			(7,324	)
Proceeds from issuance of debt		0			0			7,183
Cash premium on debt exchange		(3,417	)		0			0
Repayments of debt		(5,518	)		(4,000	)		(10,060	)
Common stock issued		1,343			1,142			1,002
Common stock repurchased		(22,968	)		(19,543	)		(10,721	)
Common stock cash dividends paid		(15,137	)		(13,811	)		(12,699	)
Other, net		(334	)		(675	)		(971	)


Net cash used in financing		(46,031	)		(36,887	)		(33,590	)


Investing
Additions to property and equipment		(15,441	)		(13,925	)		(11,632	)
Acquisition of companies, net of cash acquired, and purchases of intangible and other assets		(2,521	)		(2,388	)		(888	)
Purchases of investments		(77,190	)		(57,697	)		(137,380	)
Maturities of investments		66,449			20,043			26,360
Sales of investments		17,721			38,194			117,577
Other, net		(1,241	)		0			(98	)


Net cash used in investing		(12,223	)		(15,773	)		(6,061	)


Effect of foreign exchange rates on cash and cash equivalents		(201	)		(115	)		50


Net change in cash and cash equivalents		2,220			(590	)		4,283
Cash and cash equivalents, beginning of period		11,356			11,946			7,663


Cash and cash equivalents, end of period	$	13,576		$	11,356		$	11,946

Refer to accompanying notes.

PART II

Item 8

STOCKHOLDERS’ EQUITY STATEMENTS

(In millions)


Year Ended June 30,	2020			2019			2018

Common stock and paid-in capital
Balance, beginning of period	$	78,520		$	71,223		$	69,315
Common stock issued		1,343			6,829			1,002
Common stock repurchased		(4,599	)		(4,195	)		(3,033	)
Stock-based compensation expense		5,289			4,652			3,940
Other, net		(1	)		11			(1	)


Balance, end of period		80,552			78,520			71,223


Retained earnings
Balance, beginning of period		24,150			13,682			17,769
Net income		44,281			39,240			16,571
Common stock cash dividends		(15,483	)		(14,103	)		(12,917	)
Common stock repurchased		(18,382	)		(15,346	)		(7,699	)
Cumulative effect of accounting changes		0			677			(42	)


Balance, end of period		34,566			24,150			13,682


Accumulated other comprehensive income (loss)
Balance, beginning of period		(340	)		(2,187	)		627
Other comprehensive income (loss)		3,526			1,914			(2,856	)
Cumulative effect of accounting changes		0			(67	)		42


Balance, end of period		3,186			(340	)		(2,187	)


Total stockholders’ equity	$	118,304		$	102,330		$	82,718


Cash dividends declared per common share	$	2.04		$	1.84		$	1.68

Refer to accompanying notes.

PART II

Item 8

NOTES TO FINANCIAL STATEMENTS

NOTE 1 — ACCOUNTING POLICIES

Accounting Principles

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Principles of Consolidation

The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated.

Estimates and Assumptions

Foreign Currencies

Revenue

Product Revenue and Service and Other Revenue

Product revenue includes sales from operating systems; cross-device productivity applications; server applications; business solution applications; desktop and server management tools; software development tools; video games; and hardware such as PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories.

Service and other revenue includes sales from cloud-based solutions that provide customers with software, services, platforms, and content such as Office 365, Azure, Dynamics 365, and Xbox Live; solution support; and consulting services. Service and other revenue also includes sales from online advertising and LinkedIn.

PART II

Item 8

Revenue Recognition

Nature of Products and Services

Refer to Note 19 – Segment Information and Geographic Data for further information, including revenue by significant product and service offering.

Significant Judgments

PART II

Item 8

Contract Balances

As of June 30, 2020 and 2019, long-term accounts receivable, net of allowance for doubtful accounts, was $2.7 billion and $2.2 billion, respectively, and is included in other long-term assets in our consolidated balance sheets.

Activity in the allowance for doubtful accounts was as follows:

(In millions)


Year Ended June 30,		2020			2019			2018

Balance, beginning of period	$	434		$	397		$	361
Charged to costs and other		560			153			134
Write-offs		(178	)		(116	)		(98	)


Balance, end of period	$	816		$	434		$	397

Allowance for doubtful accounts included in our consolidated balance sheets:

(In millions)


June 30,		2020		2019		2018

Accounts receivable, net of allowance for doubtful accounts	$	788	$	411	$	377
Other long-term assets		28		23		20


Total	$	816	$	434	$	397

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Item 8

Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include SA and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for consulting services to be performed in the future; LinkedIn subscriptions; Office 365 subscriptions; Xbox Live subscriptions; Windows 10 post-delivery support; Dynamics business solutions; Skype prepaid credits and subscriptions; and other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service.

Refer to Note 13 – Unearned Revenue for further information, including unearned revenue by segment and changes in unearned revenue during the period.

We record financing receivables when we offer certain of our customers the option to acquire our software products and services offerings through a financing program in a limited number of countries. As of June 30, 2020 and 2019, our financing receivables, net were $5.2 billion and $4.3 billion, respectively, for short-term and long-term financing receivables, which are included in other current assets and other long-term assets in our consolidated balance sheets. We record an allowance to cover expected losses based on troubled accounts, historical experience, and other currently available evidence.

Assets Recognized from Costs to Obtain a Contract with a Customer

Cost of Revenue

Product Warranty

PART II

Item 8

Research and Development

Sales and Marketing

Stock-Based Compensation

Compensation expense for the employee stock purchase plan (“ESPP”) is measured as the discount the employee is entitled to upon purchase and is recognized in the period of purchase.

Income Taxes

Financial Instruments

Investments

PART II

Item 8

Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding other-than-temporary impairments, are recorded in other comprehensive income. Debt investments are impaired when a decline in fair value is judged to be other-than-temporary. Fair value is calculated based on publicly available market information or other estimates determined by management. We employ a systematic methodology on a quarterly basis that considers available quantitative and qualitative evidence in evaluating potential impairment of our investments. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the duration and extent to which the fair value is less than cost. We also evaluate whether we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery. In addition, we consider specific adverse conditions related to the financial health of, and business outlook, for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in other income (expense), net and a new cost basis in the investment is established.

Equity investments with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). We perform a qualitative assessment on a quarterly basis and recognize an impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in value are recorded in other income (expense), net.

Derivatives

For derivative instruments designated as cash flow hedges, gains and losses are initially reported as a component of other comprehensive income and subsequently recognized in earnings with the corresponding hedged item. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in earnings.

For derivative instruments that are not designated as hedges, gains and losses from changes in fair values are primarily recognized in other income (expense), net.

Fair Value Measurements

•

Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies. Our Level 2 investments include commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Our Level 2 derivative assets and liabilities primarily include certain over-the-counter option and swap contracts.

PART II

Item 8

•

Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.

Inventories

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation, and depreciated using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. The estimated useful lives of our property and equipment are generally as follows: computer software developed or acquired for internal use, three to seven years; computer equipment, two to three years; buildings and improvements, five to 15 years; leasehold improvements, three to 20 years; and furniture and equipment, one to 10 years. Land is not depreciated.

Leases

Goodwill

PART II

Item 8

Intangible Assets

Recent Accounting Guidance

Recently Adopted Accounting Guidance

Financial Instruments – Targeted Improvements to Accounting for Hedging Activities

In August 2017, the Financial Accounting Standards Board (“FASB”) issued new guidance related to accounting for hedging activities. This guidance expands strategies that qualify for hedge accounting, changes how many hedging relationships are presented in the financial statements, and simplifies the application of hedge accounting in certain situations. We adopted the standard effective July 1, 2019. As we did not hold derivative instruments requiring an adjustment upon adoption, there was no impact in our consolidated financial statements. Adoption of the standard enhanced the presentation of the effects of our hedging instruments and the hedged items in our consolidated financial statements to increase the understandability of the results of our hedging strategies.

Recent Accounting Guidance Not Yet Adopted

Financial Instruments – Credit Losses

In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We will be required to use a forward-looking expected credit loss model for accounts receivable, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The standard will be adopted upon the effective date for us beginning July 1, 2020. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align our credit loss methodology with the new standard. We have evaluated the impact of this standard in our consolidated financial statements, including accounting policies, processes, and systems. We continue to monitor economic implications of the COVID-19 pandemic. Based on current market conditions, adoption of the standard will not have a material impact on our consolidated financial statements.

Accounting for Income Taxes

In December 2019, the FASB issued a new standard to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard will be effective for us beginning July 1, 2021, with early adoption permitted. We are currently evaluating the impact of this standard in our consolidated financial statements, including accounting policies, processes, and systems.

NOTE 2 — EARNINGS PER SHARE

PART II

Item 8

The components of basic and diluted EPS were as follows:

(In millions, except earnings per share)


Year Ended June 30,	2020		2019		2018

Net income available for common shareholders (A)	$	44,281	$	39,240	$	16,571

Weighted average outstanding shares of common stock (B)		7,610		7,673		7,700
Dilutive effect of stock-based awards		73		80		94


Common stock and common stock equivalents (C)		7,683		7,753		7,794


Earnings Per Share

Basic (A/B)	$	5.82	$	5.11	$	2.15
Diluted (A/C)	$	5.76	$	5.06	$	2.13

Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.

NOTE 3 — OTHER INCOME (EXPENSE), NET

The components of other income (expense), net were as follows:

(In millions)


Year Ended June 30,	2020			2019			2018

Interest and dividends income	$	2,680		$	2,762		$	2,214
Interest expense		(2,591	)		(2,686	)		(2,733	)
Net recognized gains on investments		32			648			2,399
Net gains (losses) on derivatives		187			144			(187	)
Net losses on foreign currency remeasurements		(191	)		(82	)		(218	)
Other, net		(40	)		(57	)		(59	)


Total	$	77		$	729		$	1,416

Net Recognized Gains (Losses) on Investments

Net recognized gains (losses) on debt investments were as follows:

(In millions)


Year Ended June 30,	2020			2019			2018

Realized gains from sales of available-for-sale securities	$	50		$	12		$	27
Realized losses from sales of available-for-sale securities		(37	)		(93	)		(987	)
Other-than-temporary impairments of investments		(17	)		(16	)		(6	)


Total	$	(4	)	$	(97	)	$	(966	)

Net recognized gains (losses) on equity investments were as follows:

(In millions)


Year Ended June 30,	2020			2019			2018

Net realized gains on investments sold	$	83		$	276		$	3,406
Net unrealized gains on investments still held		69			479			0
Impairments of investments		(116	)		(10	)		(41	)


Total	$	36		$	745		$	3,365

PART II

Item 8

NOTE 4 — INVESTMENTS

Investment Components

The components of investments were as follows:

(In millions)	Fair Value Level		Cost Basis		Unrealized Gains		Unrealized Losses			Recorded Basis		Cash and Cash Equivalents		Short-term Investments		Equity Investments


June 30, 2020

Changes in Fair Value Recorded in Other Comprehensive Income

Commercial paper		Level 2	$	4,687	$	1	$	0		$	4,688	$	1,618	$	3,070	$	0
Certificates of deposit		Level 2		2,898		0		0			2,898		1,646		1,252		0
U.S. government securities		Level 1		92,067		6,495		(1	)		98,561		3,168		95,393		0
U.S. agency securities		Level 2		2,439		2		0			2,441		449		1,992		0
Foreign government bonds		Level 2		6,982		6		(3	)		6,985		1		6,984		0
Mortgage- and asset-backed securities		Level 2		4,865		41		(6	)		4,900		0		4,900		0
Corporate notes and bonds		Level 2		8,500		327		(17	)		8,810		0		8,810		0
Corporate notes and bonds		Level 3		58		0		0			58		0		58		0
Municipal securities		Level 2		313		57		(4	)		366		0		366		0
Municipal securities		Level 3		91		0		0			91		0		91		0


Total debt investments			$	122,900	$	6,929	$	(31	)	$	129,798	$	6,882	$	122,916	$	0


Changes in Fair Value Recorded in Net Income

Equity investments		Level 1								$	1,198	$	784	$	0	$	414
Equity investments		Other									2,551		0		0		2,551


Total equity investments										$	3,749	$	784	$	0	$	2,965


Cash										$	5,910	$	5,910	$	0	$	0
Derivatives, net^(a)											35		0		35		0


Total										$	139,492	$	13,576	$	122,951	$	2,965

PART II

Item 8

(In millions)	Fair Value Level		Cost Basis		Unrealized Gains		Unrealized Losses			Recorded Basis		Cash and Cash Equivalents		Short-term Investments		Equity Investments


June 30, 2019

Changes in Fair Value Recorded in Other Comprehensive Income

Commercial paper		Level 2	$	2,211	$	0	$	0		$	2,211	$	1,773	$	438	$	0
Certificates of deposit		Level 2		2,018		0		0			2,018		1,430		588		0
U.S. government securities		Level 1		104,925		1,854		(104	)		106,675		769		105,906		0
U.S. agency securities		Level 2		988		0		0			988		698		290		0
Foreign government bonds		Level 2		6,350		4		(8	)		6,346		2,506		3,840		0
Mortgage- and asset-backed securities		Level 2		3,554		10		(3	)		3,561		0		3,561		0
Corporate notes and bonds		Level 2		7,437		111		(7	)		7,541		0		7,541		0
Corporate notes and bonds		Level 3		15		0		0			15		0		15		0
Municipal securities		Level 2		242		48		0			290		0		290		0
Municipal securities		Level 3		7		0		0			7		0		7		0


Total debt investments			$	127,747	$	2,027	$	(122	)	$	129,652	$	7,176	$	122,476	$	0


Changes in Fair Value Recorded in Net Income

Equity investments		Level 1								$	973	$	409	$	0	$	564
Equity investments		Other									2,085		0		0		2,085


Total equity investments										$	3,058	$	409	$	0	$	2,649


Cash										$	3,771	$	3,771	$	0	$	0
Derivatives, net^(a)											(13)		0		(13)		0


Total										$	136,468	$	11,356	$	122,463	$	2,649

(a)	Refer to Note 5 – Derivatives for further information on the fair value of our derivative instruments.

Equity investments presented as “Other” in the tables above include investments without readily determinable fair values measured using the equity method or measured at cost with adjustments for observable changes in price or impairments, and investments measured at fair value using net asset value as a practical expedient which are not categorized in the fair value hierarchy. As of June 30, 2020 and 2019, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $1.4 billion and $1.2 billion, respectively.

Unrealized Losses on Debt Investments

Debt investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows:

	Less than 12 Months					12 Months or Greater						Total Unrealized Losses


(In millions)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Total Fair Value


June 30, 2020

U.S. government and agency securities	$	2,323	$	(1	)	$	0	$	0	$	2,323	$	(1	)
Foreign government bonds		500		(3	)		0		0		500		(3	)
Mortgage- and asset-backed securities		1,014		(6	)		0		0		1,014		(6	)
Corporate notes and bonds		649		(17	)		0		0		649		(17	)
Municipal securities		66		(4	)		0		0		66		(4	)


Total	$	4,552	$	(31	)	$	0	$	0	$	4,552	$	(31	)

PART II

Item 8

	Less than 12 Months					12 Months or Greater							Total Unrealized Losses


(In millions)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Total Fair Value


June 30, 2019

U.S. government and agency securities	$	1,491	$	(1	)	$	39,158	$	(103	)	$	40,649	$	(104	)
Foreign government bonds		25		0			77		(8	)		102		(8	)
Mortgage- and asset-backed securities		664		(1	)		378		(2	)		1,042		(3	)
Corporate notes and bonds		498		(3	)		376		(4	)		874		(7	)


Total	$	2,678	$	(5	)	$	39,989	$	(117	)	$	42,667	$	(122	)

Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Management does not believe any remaining unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence.

Debt Investment Maturities

(In millions)	Cost Basis		Estimated Fair Value


June 30, 2020

Due in one year or less	$	36,169	$	36,276
Due after one year through five years		51,465		54,700
Due after five years through 10 years		32,299		35,674
Due after 10 years		2,967		3,148


Total	$	122,900	$	129,798

NOTE 5 — DERIVATIVES

Foreign Currencies

PART II

Item 8

Interest Rate

Equity

Credit

Credit-Risk-Related Contingent Features

Certain of our counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the standard convention related to over-the-counter derivatives. As of June 30, 2020, our long-term unsecured debt rating was AAA, and cash investments were in excess of $1.0 billion. As a result, no collateral was required to be posted.

The following table presents the notional amounts of our outstanding derivative instruments measured in U.S. dollar equivalents:

(In millions)	June 30, 2020		June 30, 2019


Designated as Hedging Instruments

Foreign exchange contracts purchased	$	635	$	0
Foreign exchange contracts sold		6,754		6,034
Interest rate contracts purchased		1,295		0

Not Designated as Hedging Instruments

Foreign exchange contracts purchased		11,896		14,889
Foreign exchange contracts sold		15,595		15,614
Other contracts purchased		1,844		2,007
Other contracts sold		757		456

PART II

Item 8

Fair Values of Derivative Instruments

The following table presents our derivative instruments:

	Derivative			Derivative				Derivative				Derivative
(In millions)	Assets			Liabilities				Assets				Liabilities


	June 30, 2020							June 30, 2019

Designated as Hedging Instruments

Foreign exchange contracts	$	44			$	(54	)		$	0			$	(93	)
Interest rate contracts		93				0				0				0

Not Designated as Hedging Instruments

Foreign exchange contracts		245				(334	)			204				(172	)
Other contracts		18				(11	)			46				(7	)


Gross amounts of derivatives		400				(399	)			250				(272	)
Gross amounts of derivatives offset in the balance sheet		(154	)			158				(113	)			114
Cash collateral received		0				(154	)			0				(78	)


Net amounts of derivatives	$	246			$	(395	)		$	137			$	(236	)


Reported as

Short-term investments	$	35			$	0			$	(13	)		$	0
Other current assets		199				0				146				0
Other long-term assets		12				0				4				0
Other current liabilities		0				(334	)			0				(221	)
Other long-term liabilities		0				(61	)			0				(15	)


Total	$	246			$	(395	)		$	137			$	(236	)

Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $399 million and $399 million, respectively, as of June 30, 2020, and $247 million and $272 million, respectively, as of June 30, 2019.

The following table presents the fair value of our derivatives instruments on a gross basis:

(In millions)	Level 1			Level 2		Level 3		Total


June 30, 2020

Derivative assets	$	1	$	398		$	1	$	400
Derivative liabilities		0		(399	)		0		(399	)

June 30, 2019

Derivative assets		0		247			3		250
Derivative liabilities		0		(272	)		0		(272	)

PART II

Item 8

Gains (losses) on derivative instruments recognized in our consolidated income statements were as follows:

(In millions)


Year Ended June 30,	2020					2019						2018

	Revenue		Other Income (Expense), Net				Revenue			Other Income (Expense), Net			Revenue			Other Income (Expense), Net


Designated as Fair Value Hedging Instruments

Foreign exchange contracts
Derivatives	$	0	$	1			$	0		$	(130	)	$	0		$	(78	)
Hedged items		0		3				0			130			0			78
Excluded from effectiveness assessment		0		139				0			168			0			103
Interest rate contracts
Derivatives		0		93				0			0			0			0
Hedged items		0		(93	)			0			0			0			0
Equity contracts
Derivatives		0		0				0			0			0			(324	)
Hedged items		0		0				0			0			0			324
Excluded from effectiveness assessment		0		0				0			0			0			80

Designated as Cash Flow Hedging Instruments

Foreign exchange contracts
Amount reclassified from accumulated other comprehensive income		0		0				341			0			185			0
Excluded from effectiveness assessment		0		0				(64	)		0			(255	)		0

Not Designated as Hedging Instruments

Foreign exchange contracts		0		(123	)			0			(97	)		0			(33	)
Other contracts		0		50				0			38			0			(104	)

Gains (losses), net of tax, on derivative instruments recognized in our consolidated comprehensive income statements were as follows:

(In millions)


Year Ended June 30,	2020			2019		2018

Designated as Cash Flow Hedging Instruments

Foreign exchange contracts
Included in effectiveness assessment	$	(38	)	$	159	$	219

NOTE 6 — INVENTORIES

The components of inventories were as follows:

(In millions)


June 30,	2020		2019

Raw materials	$	700	$	399
Work in process		83		53
Finished goods		1,112		1,611


Total	$	1,895	$	2,063

PART II

Item 8

NOTE 7 — PROPERTY AND EQUIPMENT

The components of property and equipment were as follows:

(In millions)


June 30,	2020			2019

Land	$	1,823		$	1,540
Buildings and improvements		33,995			26,288
Leasehold improvements		5,487			5,316
Computer equipment and software		41,261			33,823
Furniture and equipment		4,782			4,840


Total, at cost		87,348			71,807
Accumulated depreciation		(43,197	)		(35,330	)


Total, net	$	44,151		$	36,477

During fiscal years 2020, 2019, and 2018, depreciation expense was $10.7 billion, $9.7 billion, and $7.7 billion, respectively. We have committed $5.0 billion for the construction of new buildings, building improvements, and leasehold improvements as of June 30, 2020.

During fiscal year 2020, we recorded an impairment charge of $186 million to Property and Equipment, primarily to leasehold improvements, due to the closing of our Microsoft Store physical locations.

NOTE 8 — BUSINESS COMBINATIONS

GitHub, Inc.

The allocation of the purchase price to goodwill was completed as of June 30, 2019. The major classes of assets and liabilities to which we allocated the purchase price were as follows:

(In millions)


Cash, cash equivalents, and short-term investments	$	234
Goodwill		5,497
Intangible assets		1,267
Other assets		143
Other liabilities		(217	)


Total	$	6,924

PART II

Item 8

Following are the details of the purchase price allocated to the intangible assets acquired:

(In millions)	Amount		Weighted Average Life


Customer-related	$	648		8 years
Technology-based		447		5 years
Marketing-related		170		10 years
Contract-based		2		2 years


Total	$	1,267		7 years

Transactions recognized separately from the purchase price allocation were approximately $600 million, primarily related to equity awards recognized as expense over the related service period.

Other

During fiscal year 2020, we completed 15 acquisitions for $2.4 billion, substantially all of which were paid in cash. These entities have been included in our consolidated results of operations since their respective acquisition dates. The effects of these business combinations, individually and in aggregate, were not material to our consolidated results of operations.

NOTE 9 — GOODWILL

Changes in the carrying amount of goodwill were as follows:

(In millions)		June 30, 2018		Acquisitions			Other			June 30, 2019		Acquisitions		Other			June 30, 2020


Productivity and Business Processes	$	23,823	$	514		$	(60	)	$	24,277	$	7	$	(94	)	$	24,190
Intelligent Cloud		5,703		5,605	^(a)		43	^(a)		11,351		1,351		(5	)		12,697
More Personal Computing		6,157		289			(48	)		6,398		96		(30	)		6,464


Total	$	35,683	$	6,408		$	(65	)	$	42,026	$	1,454	$	(129	)	$	43,351

(a)	Includes goodwill of $5.5 billion related to GitHub. See Note 8 – Business Combinations for further information.

Goodwill Impairment

No instances of impairment were identified in our May 1, 2020, May 1, 2019, or May 1, 2018 tests. As of June 30, 2020 and 2019, accumulated goodwill impairment was $11.3 billion.

PART II

Item 8

NOTE 10 — INTANGIBLE ASSETS

The components of intangible assets, all of which are finite-lived, were as follows:

(In millions)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount


June 30,						2020								2019

Technology-based	$	8,160	$	(6,381	)	$	1,779	$	7,691		$	(5,771	)	$	1,920
Customer-related		4,967		(2,320	)		2,647		4,709			(1,785	)		2,924
Marketing-related		4,158		(1,588	)		2,570		4,165			(1,327	)		2,838
Contract-based		474		(432	)		42		574			(506	)		68


Total	$	17,759	$	(10,721	)	$	7,038	$	17,139	^(a)	$	(9,389	)	$	7,750

(a)	Includes intangible assets of $1.3 billion related to GitHub. See Note 8 – Business Combinations for further information.

No material impairments of intangible assets were identified during fiscal years 2020, 2019, or 2018. We estimate that we have no significant residual value related to our intangible assets.

The components of intangible assets acquired during the periods presented were as follows:

(In millions)	Amount		Weighted Average Life		Amount		Weighted Average Life


Year Ended June 30,	2020				2019

Technology-based	$	531		6 years	$	814		5 years
Customer-related		303		5 years		710		8 years
Marketing-related		2		2 years		177		10 years
Contract-based		0		0 years		7		3 years


Total	$	836		5 years	$	1,708		7 years

Intangible assets amortization expense was $1.6 billion, $1.9 billion, and $2.2 billion for fiscal years 2020, 2019, and 2018, respectively.

The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2020:

(In millions)


Year Ending June 30,

2021	$	1,483
2022		1,399
2023		1,219
2024		851
2025		447
Thereafter		1,639


Total	$	7,038

PART II

Item 8

NOTE 11 — DEBT

The components of debt were as follows:

(In millions, issuance by calendar year)	Maturities (calendar year)				Stated Interest Rate				Effective Interest Rate			June 30, 2020				June 30, 2019


2009 issuance of $3.8 billion ^(a)				2039				5.20%			5.24%		$	559		$	750
2010 issuance of $4.8 billion ^(a)		2020	–	2040		3.00%	–	4.50%	3.14%	–	4.57%			1,571			2,000
2011 issuance of $2.3 billion ^(a)		2021	–	2041		4.00%	–	5.30%	4.08%	–	5.36%			1,270			1,500
2012 issuance of $2.3 billion		2022	–	2042		2.13%	–	3.50%	2.24%	–	3.57%			1,650			1,650
2013 issuance of $5.2 billion ^(a)		2023	–	2043		2.38%	–	4.88%	2.47%	–	4.92%			2,919			3,500
2013 issuance of €4.1 billion		2021	–	2033		2.13%	–	3.13%	2.23%	–	3.22%			4,549			4,613
2014 issuance														0			18
2015 issuance of $23.8 billion ^(a)		2020	–	2055		2.00%	–	4.75%	2.09%	–	4.78%			15,549			22,000
2016 issuance of $19.8 billion ^(a)		2021	–	2056		1.55%	–	3.95%	1.64%	–	4.03%			16,955			19,750
2017 issuance of $17.0 billion ^(a)		2022	–	2057		2.40%	–	4.50%	2.52%	–	4.53%			12,385			17,000
2020 issuance of $10.0 billion ^(a)		2050	–	2060		2.53%	–	2.68%	2.53%	–	2.68%			10,000			0


Total face value														67,407			72,781
Unamortized discount and issuance costs														(554	)		(603	)
Hedge fair value adjustments ⁽^b⁾														93			0
Premium on debt exchange ^(a)														(3,619	)		0


Total debt														63,327			72,178
Current portion of long-term debt														(3,749	)		(5,516	)


Long-term debt													$	59,578		$	66,662

(a)	In June 2020, we exchanged a portion of our existing debt at premium for cash and new debt with longer maturities. The premium will be amortized over the term of the new debt.

(b)	Refer to Note 5 – Derivatives for further information on the interest rate swaps related to fixed-rate debt.

As of June 30, 2020 and 2019, the estimated fair value of long-term debt, including the current portion, was $77.1 billion and $78.9 billion, respectively. The estimated fair values are based on Level 2 inputs.

The following table outlines maturities of our long-term debt, including the current portion, as of June 30, 2020:

(In millions)


Year Ending June 30,

2021	$	3,750
2022		7,966
2023		2,750
2024		5,250
2025		2,250
Thereafter		45,441


Total	$	67,407

PART II

Item 8

NOTE 12 — INCOME TAXES

Tax Cuts and Jobs Act

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law, which significantly changed existing U.S. tax law and included numerous provisions that affect our business. We recorded a provisional net charge of $13.7 billion related to the enactment of the TCJA in fiscal year 2018, and adjusted the provisional net charge by recording additional tax expense of $157 million in fiscal year 2019 pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 118.

Provision for Income Taxes

The components of the provision for income taxes were as follows:

(In millions)


Year Ended June 30,	2020			2019			2018

Current Taxes

U.S. federal	$	3,537		$	4,718		$	19,764
U.S. state and local		763			662			934
Foreign		4,444			5,531			4,348


Current taxes	$	8,744		$	10,911		$	25,046

Deferred Taxes

U.S. federal	$	58		$	(5,647	)	$	(4,292	)
U.S. state and local		(6	)		(1,010	)		(458	)
Foreign		(41	)		194			(393	)


Deferred taxes	$	11		$	(6,463	)	$	(5,143	)


Provision for income taxes	$	8,755		$	4,448		$	19,903

U.S. and foreign components of income before income taxes were as follows:

(In millions)


Year Ended June 30,	2020		2019		2018

U.S.	$	24,116	$	15,799	$	11,527
Foreign		28,920		27,889		24,947


Income before income taxes	$	53,036	$	43,688	$	36,474

PART II

Item 8

Effective Tax Rate

The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows:



Year Ended June 30,	2020		2019		2018

Federal statutory rate		21.0%		21.0%		28.1%
Effect of:
Foreign earnings taxed at lower rates		(3.7)%		(4.1)%		(7.8)%
Impact of the enactment of the TCJA		0%		0.4%		37.7%
Impact of intangible property transfers		0%		(5.9)%		0%
Foreign-derived intangible income deduction		(1.1)%		(1.4)%		0%
State income taxes, net of federal benefit		1.3%		0.7%		1.3%
Research and development credit		(1.1)%		(1.1)%		(1.3)%
Excess tax benefits relating to stock-based compensation		(2.2)%		(2.2)%		(2.5)%
Interest, net		1.0%		1.0%		1.2%
Other reconciling items, net		1.3%		1.8%		(2.1)%


Effective rate		16.5%		10.2%		54.6%

The decrease from the federal statutory rate in fiscal year 2020 is primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland and Puerto Rico, and tax benefits relating to stock-based compensation. The decrease from the federal statutory rate in fiscal year 2019 is primarily due to a $2.6 billion net income tax benefit related to intangible property transfers, and earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland, Singapore, and Puerto Rico. The increase from the federal statutory rate in fiscal year 2018 is primarily due to the net charge related to the enactment of the TCJA in the second quarter of fiscal year 2018, offset in part by earnings taxed at lower rates in foreign jurisdictions. In fiscal year 2020, our foreign regional operating centers in Ireland and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated 86% of our foreign income before tax. In fiscal years 2019 and 2018, our foreign regional operating centers in Ireland, Singapore, and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated 82% and 87% of our foreign income before tax, respectively. Other reconciling items, net consists primarily of tax credits and GILTI tax. In fiscal years 2020, 2019, and 2018, there were no individually significant other reconciling items.

The increase in our effective tax rate for fiscal year 2020 compared to fiscal year 2019 was primarily due to a $2.6 billion net income tax benefit in the fourth quarter of fiscal year 2019 related to intangible property transfers. The decrease in our effective tax rate for fiscal year 2019 compared to fiscal year 2018 was primarily due to the net charge related to the enactment of the TCJA in the second quarter of fiscal year 2018, and a $2.6 billion net income tax benefit in the fourth quarter of fiscal year 2019 related to intangible property transfers.

PART II

Item 8

The components of the deferred income tax assets and liabilities were as follows:

(In millions)


June 30,	2020			2019

Deferred Income Tax Assets

Stock-based compensation expense	$	461		$	406
Accruals, reserves, and other expenses		2,721			2,287
Loss and credit carryforwards		865			3,518
Depreciation and amortization		6,361			7,046
Leasing liabilities		3,025			1,594
Unearned revenue		1,553			475
Other		354			367


Deferred income tax assets		15,340			15,693
Less valuation allowance		(755	)		(3,214	)


Deferred income tax assets, net of valuation allowance	$	14,585		$	12,479


Deferred Income Tax Liabilities

Book/tax basis differences in investments and debt	$	(2,642	)	$	(738	)
Unearned revenue		0			(30	)
Leasing assets		(2,817	)		(1,510	)
Deferred GILTI tax liabilities		(2,581	)		(2,607	)
Other		(344	)		(291	)


Deferred income tax liabilities	$	(8,384	)	$	(5,176	)


Net deferred income tax assets	$	6,201		$	7,303


Reported As

Other long-term assets	$	6,405		$	7,536
Long-term deferred income tax liabilities		(204	)		(233	)


Net deferred income tax assets	$	6,201		$	7,303

As of June 30, 2020, we had federal, state, and foreign net operating loss carryforwards of $547 million, $975 million, and $2.0 billion, respectively. The federal and state net operating loss carryforwards will expire in various years from fiscal 2021 through 2040, if not utilized. The majority of our foreign net operating loss carryforwards do not expire. Certain acquired net operating loss carryforwards are subject to an annual limitation, but are expected to be realized with the exception of those which have a valuation allowance.

Income taxes paid, net of refunds, were $12.5 billion, $8.4 billion, and $5.5 billion in fiscal years 2020, 2019, and 2018, respectively.

Uncertain Tax Positions

Gross unrecognized tax benefits related to uncertain tax positions as of June 30, 2020, 2019, and 2018, were $13.8 billion, $13.1 billion, and $12.0 billion, respectively, which were primarily included in long-term income taxes in our consolidated balance sheets. If recognized, the resulting tax benefit would affect our effective tax rates for fiscal years 2020, 2019, and 2018 by $12.1 billion, $12.0 billion, and $11.3 billion, respectively.

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As of June 30, 2020, 2019, and 2018, we had accrued interest expense related to uncertain tax positions of $4.0 billion, $3.4 billion, and $3.0 billion, respectively, net of income tax benefits. The provision for income taxes for fiscal years 2020, 2019, and 2018 included interest expense related to uncertain tax positions of $579 million, $515 million, and $688 million, respectively, net of income tax benefits.

The aggregate changes in the gross unrecognized tax benefits related to uncertain tax positions were as follows:

(In millions)


Year Ended June 30,	2020			2019			2018

Beginning unrecognized tax benefits	$	13,146		$	11,961		$	11,737
Decreases related to settlements		(31	)		(316	)		(193	)
Increases for tax positions related to the current year		647			2,106			1,445
Increases for tax positions related to prior years		366			508			151
Decreases for tax positions related to prior years		(331	)		(1,113	)		(1,176	)
Decreases due to lapsed statutes of limitations		(5	)		0			(3	)


Ending unrecognized tax benefits	$	13,792		$	13,146		$	11,961

We settled a portion of the Internal Revenue Service (“IRS”) audit for tax years 2004 to 2006 in fiscal year 2011. In February 2012, the IRS withdrew its 2011 Revenue Agents Report related to unresolved issues for tax years 2004 to 2006 and reopened the audit phase of the examination. We also settled a portion of the IRS audit for tax years 2007 to 2009 in fiscal year 2016, and a portion of the IRS audit for tax years 2010 to 2013 in fiscal year 2018. We remain under audit for tax years 2004 to 2013. In April 2020, the IRS commenced the audit for tax years 2014 to 2017.

As of June 30, 2020, the primary unresolved issues for the IRS audits relate to transfer pricing, which could have a material impact in our consolidated financial statements when the matters are resolved. We believe our allowances for income tax contingencies are adequate. We have not received a proposed assessment for the unresolved issues and do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months.

We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years 1996 to 2019, some of which are currently under audit by local tax authorities. The resolution of each of these audits is not expected to be material to our consolidated financial statements.

NOTE 13 — UNEARNED REVENUE

Unearned revenue by segment was as follows:

(In millions)


June 30,	2020		2019

Productivity and Business Processes	$	18,643	$	16,831
Intelligent Cloud		16,620		16,988
More Personal Computing		3,917		3,387


Total	$	39,180	$	37,206

Changes in unearned revenue were as follows:

(In millions)


Year Ended June 30, 2020

Balance, beginning of period	$	37,206
Deferral of revenue		78,922
Recognition of unearned revenue		(76,948	)


Balance, end of period	$	39,180

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Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $111 billion as of June 30, 2020, of which $107 billion is related to the commercial portion of revenue. We expect to recognize approximately 50% of this revenue over the next 12 months and the remainder thereafter.

NOTE 14 — LEASES

We have operating and finance leases for datacenters, corporate offices, research and development facilities, retail stores, and certain equipment. Our leases have remaining lease terms of 1 year to 20 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year.

The components of lease expense were as follows:

(In millions)


Year Ended June 30,	2020			2019		2018

Operating lease cost	$	2,043	$	1,707	$	1,585


Finance lease cost:
Amortization of right-of-use assets	$	611	$	370	$	243
Interest on lease liabilities		336		247		175


Total finance lease cost	$	947	$	617	$	418

Supplemental cash flow information related to leases was as follows:

(In millions)


Year Ended June 30,	2020			2019		2018

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,829	$	1,670	$	1,522
Operating cash flows from finance leases		336		247		175
Financing cash flows from finance leases		409		221		144

Right-of-use assets obtained in exchange for lease obligations:
Operating leases		3,677		2,303		1,571
Finance leases		3,467		2,532		1,933

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Supplemental balance sheet information related to leases was as follows:

(In millions, except lease term and discount rate)


June 30,	2020			2019

Operating Leases

Operating lease right-of-use assets	$	8,753		$	7,379


Other current liabilities	$	1,616		$	1,515
Operating lease liabilities		7,671			6,188


Total operating lease liabilities	$	9,287		$	7,703


Finance Leases

Property and equipment, at cost	$	10,371		$	7,041
Accumulated depreciation		(1,385	)		(774	)


Property and equipment, net	$	8,986		$	6,267


Other current liabilities	$	540		$	317
Other long-term liabilities		8,956			6,257


Total finance lease liabilities	$	9,496		$	6,574


Weighted Average Remaining Lease Term

Operating leases		8 years			7 years
Finance leases		13 years			13 years

Weighted Average Discount Rate

Operating leases		2.7%			3.0%
Finance leases		3.9%			4.6%

Maturities of lease liabilities were as follows:

(In millions)


Year Ending June 30,	Operating Leases			Finance Leases

2021	$	1,807		$	880
2022		1,652			894
2023		1,474			903
2024		1,262			916
2025		1,000			1,236
Thereafter		3,122			7,194


Total lease payments		10,317			12,023
Less imputed interest		(1,030	)		(2,527	)


Total	$	9,287		$	9,496

As of June 30, 2020, we have additional operating and finance leases, primarily for datacenters, that have not yet commenced of $3.4 billion and $3.5 billion, respectively. These operating and finance leases will commence between fiscal year 2021 and fiscal year 2023 with lease terms of 1 year to 16 years.

During fiscal year 2020, we recorded an impairment charge of $161 million to operating lease right-of-use assets due to the closing of our Microsoft Store physical locations.

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NOTE 15 — CONTINGENCIES

Patent and Intellectual Property Claims

There were 64 patent infringement cases pending against Microsoft as of June 30, 2020, none of which are material individually or in aggregate.

Antitrust, Unfair Competition, and Overcharge Class Actions

The trial of the British Columbia action commenced in May 2016. Following a mediation, the parties agreed to a global settlement of all three Canadian actions, and submitted the proposed settlement agreement to the courts in all three jurisdictions for approval. The final settlement has been approved by the courts in British Columbia, Ontario, and Quebec, and the claims administration process will commence once each court approves the form of notice to the class.

Other Antitrust Litigation and Claims

China State Administration for Industry and Commerce Investigation

In 2014, Microsoft was informed that China’s State Agency for Market Regulation (“SAMR”) (formerly State Administration for Industry and Commerce) had begun a formal investigation relating to China’s Anti-Monopoly Law, and the SAMR conducted onsite inspections of Microsoft offices in Beijing, Shanghai, Guangzhou, and Chengdu. The SAMR has presented its preliminary views as to certain possible violations of China's Anti-Monopoly Law, and discussions are expected to continue.

Product-Related Litigation

U.S. Cell Phone Litigation

Microsoft Mobile Oy, a subsidiary of Microsoft, along with other handset manufacturers and network operators, is a defendant in 40 lawsuits filed in the Superior Court for the District of Columbia by individual plaintiffs who allege that radio emissions from cellular handsets caused their brain tumors and other adverse health effects. We assumed responsibility for these claims in our agreement to acquire Nokia’s Devices and Services business and have been substituted for the Nokia defendants. Nine of these cases were filed in 2002 and are consolidated for certain pre-trial proceedings; the remaining cases are stayed. In a separate 2009 decision, the Court of Appeals for the District of Columbia held that adverse health effect claims arising from the use of cellular handsets that operate within the U.S. Federal Communications Commission radio frequency emission guidelines (“FCC Guidelines”) are pre-empted by federal law. The plaintiffs allege that their handsets either operated outside the FCC Guidelines or were manufactured before the FCC Guidelines went into effect. The lawsuits also allege an industry-wide conspiracy to manipulate the science and testing around emission guidelines.

In 2013, the defendants in the consolidated cases moved to exclude the plaintiffs’ expert evidence of general causation on the basis of flawed scientific methodologies. In 2014, the trial court granted in part and denied in part the defendants’ motion to exclude the plaintiffs’ general causation experts. The defendants filed an interlocutory appeal to the District of Columbia Court of Appeals challenging the standard for evaluating expert scientific evidence. In October 2016, the Court of Appeals issued its decision adopting the standard advocated by the defendants and remanding the cases to the trial court for further proceedings under that standard. The plaintiffs have filed supplemental expert evidence, portions of which the defendants have moved to strike. In August 2018, the trial court issued an order striking portions of the plaintiffs’ expert reports. A hearing is expected to occur in the second quarter of fiscal year 2021.

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Other Contingencies

As of June 30, 2020, we accrued aggregate legal liabilities of $306 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $500 million in aggregate beyond recorded amounts are reasonably possible. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact in our consolidated financial statements for the period in which the effects become reasonably estimable.

NOTE 16 — STOCKHOLDERS’ EQUITY

Shares Outstanding

Shares of common stock outstanding were as follows:

(In millions)


Year Ended June 30,	2020			2019			2018

Balance, beginning of year		7,643			7,677			7,708
Issued		54			116			68
Repurchased		(126	)		(150	)		(99	)


Balance, end of year		7,571			7,643			7,677

Share Repurchases

On September 18, 2019, our Board of Directors approved a share repurchase program authorizing up to $40.0 billion in share repurchases. This share repurchase program commenced in February 2020, following completion of the program approved on September 20, 2016, has no expiration date, and may be terminated at any time. As of June 30, 2020, $31.7 billion remained of this $40.0 billion share repurchase program.

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We repurchased the following shares of common stock under the share repurchase programs:

(In millions)	Shares		Amount		Shares		Amount		Shares		Amount


Year Ended June 30,	2020				2019				2018

First Quarter		29	$	4,000		24	$	2,600		22	$	1,600
Second Quarter		32		4,600		57		6,100		22		1,800
Third Quarter		37		6,000		36		3,899		34		3,100
Fourth Quarter		28		5,088		33		4,200		21		2,100


Total		126	$	19,688		150	$	16,799		99	$	8,600

Shares repurchased during the fourth quarter of fiscal year 2020 were under the share repurchase program approved on September 18, 2019. Shares repurchased during the third quarter of fiscal year 2020 were under the share repurchase programs approved on both September 20, 2016 and September 18, 2019. All other shares repurchased were under the share repurchase program approved on September 20, 2016. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards of $3.3 billion, $2.7 billion, and $2.1 billion for fiscal years 2020, 2019, and 2018, respectively. All share repurchases were made using cash resources.

Dividends

Our Board of Directors declared the following dividends:

Declaration Date	Record Date		Payment Date		Dividend Per Share			Amount


Fiscal Year 2020								(In millions)

September 18, 2019		November 21, 2019		December 12, 2019		$	0.51	$	3,886
December 4, 2019		February 20, 2020		March 12, 2020			0.51		3,876
March 9, 2020		May 21, 2020		June 11, 2020			0.51		3,865
June 17, 2020		August 20, 2020		September 10, 2020			0.51		3,861


Total						$	2.04	$	15,488

Fiscal Year 2019

September 18, 2018		November 15, 2018		December 13, 2018		$	0.46	$	3,544
November 28, 2018		February 21, 2019		March 14, 2019			0.46		3,526
March 11, 2019		May 16, 2019		June 13, 2019			0.46		3,521
June 12, 2019		August 15, 2019		September 12, 2019			0.46		3,510


Total						$	1.84	$	14,101

The dividend declared on June 17, 2020 was included in other current liabilities as of June 30, 2020.

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Item 8

NOTE 17 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes in accumulated other comprehensive income (loss) by component:

(In millions)


Year Ended June 30,	2020			2019			2018

Derivatives

Balance, beginning of period	$	0		$	173		$	134
Unrealized gains (losses), net of tax of $(10), $2, and $11		(38	)		160			218
Reclassification adjustments for gains included in revenue		0			(341	)		(185	)
Tax expense included in provision for income taxes		0			8			6


Amounts reclassified from accumulated other comprehensive income (loss)		0			(333	)		(179	)


Net change related to derivatives, net of tax of $(10), $(6), and $5		(38	)		(173	)		39


Balance, end of period	$	(38	)	$	0		$	173


Investments

Balance, beginning of period	$	1,488		$	(850	)	$	1,825
Unrealized gains (losses), net of tax of $1,057, $616, and $(427)		3,987			2,331			(1,146	)
Reclassification adjustments for (gains) losses included in other income (expense), net		4			93			(2,309	)
Tax expense (benefit) included in provision for income taxes		(1	)		(19	)		738


Amounts reclassified from accumulated other comprehensive income (loss)		3			74			(1,571	)


Net change related to investments, net of tax of $1,058, $635, and $(1,165)		3,990			2,405			(2,717	)
Cumulative effect of accounting changes		0			(67	)		42


Balance, end of period	$	5,478		$	1,488		$	(850	)


Translation Adjustments and Other

Balance, beginning of period	$	(1,828	)	$	(1,510	)	$	(1,332	)
Translation adjustments and other, net of tax effects of $1, $(1), and $0		(426	)		(318	)		(178	)


Balance, end of period	$	(2,254	)	$	(1,828	)	$	(1,510	)


Accumulated other comprehensive income (loss), end of period	$	3,186		$	(340	)	$	(2,187	)

NOTE 18 — EMPLOYEE STOCK AND SAVINGS PLANS

We grant stock-based compensation to employees and directors. As of June 30, 2020, an aggregate of 283 million shares were authorized for future grant under our stock plans. Awards that expire or are canceled without delivery of shares generally become available for issuance under the plans. We issue new shares of Microsoft common stock to satisfy vesting of awards granted under our stock plans. We also have an ESPP for all eligible employees.

Stock-based compensation expense and related income tax benefits were as follows:

(In millions)


Year Ended June 30,	2020		2019		2018

Stock-based compensation expense	$	5,289	$	4,652	$	3,940
Income tax benefits related to stock-based compensation		938		816		823

Stock Plans

Stock awards entitle the holder to receive shares of Microsoft common stock as the award vests. Stock awards generally vest over a service period of four years or five years.

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Executive Incentive Plan

Activity for All Stock Plans

The fair value of stock awards was estimated on the date of grant using the following assumptions:



Year ended June 30,				2020				2019				2018

Dividends per share (quarterly amounts)	$	0.46	–	0.51	$	0.42	–	0.46	$	0.39	–	0.42
Interest rates		0.1%	–	2.2%		1.8%	–	3.1%		1.7%	–	2.9%

During fiscal year 2020, the following activity occurred under our stock plans:

Shares			Weighted Average Grant-Date Fair Value


(In millions)

Stock Awards

Nonvested balance, beginning of year	147		$	78.49
Granted ^(a)	53			140.49
Vested	(65	)		75.35
Forfeited	(9	)		90.30


Nonvested balance, end of year	126		$	105.23

(a)	Includes 2 million, 2 million, and 3 million of PSUs granted at target and performance adjustments above target levels for fiscal years 2020, 2019, and 2018, respectively.

As of June 30, 2020, there was approximately $10.2 billion of total unrecognized compensation costs related to stock awards. These costs are expected to be recognized over a weighted average period of three years. The weighted average grant-date fair value of stock awards granted was $140.49, $107.02, and $75.88 for fiscal years 2020, 2019, and 2018, respectively. The fair value of stock awards vested was $10.1 billion, $8.7 billion, and $6.6 billion, for fiscal years 2020, 2019, and 2018, respectively.

Employee Stock Purchase Plan

(Shares in millions)


Year Ended June 30,	2020		2019		2018

Shares purchased		9		11		13
Average price per share	$	142.22	$	104.85	$	76.40

As of June 30, 2020, 96 million shares of our common stock were reserved for future issuance through the ESPP.

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Savings Plan

We have savings plans in the U.S. that qualify under Section 401(k) of the Internal Revenue Code, and a number of savings plans in international locations. Eligible U.S. employees may contribute a portion of their salary into the savings plans, subject to certain limitations. We contribute fifty cents for each dollar a participant contributes into the plans, with a maximum employer contribution of 50% of the IRS contribution limit for the calendar year. Employer-funded retirement benefits for all plans were $1.0 billion, $877 million, and $807 million in fiscal years 2020, 2019, and 2018, respectively, and were expensed as contributed.

NOTE 19 — SEGMENT INFORMATION AND GEOGRAPHIC DATA

Our reportable segments are described below.

Productivity and Business Processes

•

Office Commercial, including Office 365 subscriptions, the Office portion of Microsoft 365 Commercial subscriptions, and Office licensed on-premises, comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, and Skype for Business, and related Client Access Licenses (“CALs”).

•

Office Consumer, including Microsoft 365 Consumer (formerly Office 365 Consumer) subscriptions and Office licensed on-premises, and Office Consumer Services, including Skype, Outlook.com, and OneDrive.

•

LinkedIn, including Talent Solutions, Learning Solutions, Marketing Solutions, Sales Solutions, and Premium Subscriptions.

•

Dynamics business solutions, including Dynamics 365, a set of cloud-based applications across ERP and CRM, Dynamics ERP on-premises, and Dynamics CRM on-premises.

Intelligent Cloud

Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business and developers. This segment primarily comprises:

•

Server products and cloud services, including Azure; SQL Server, Windows Server, Visual Studio, System Center, and related CALs; and GitHub.

•

Enterprise Services, including Premier Support Services and Microsoft Consulting Services.

More Personal Computing

Our More Personal Computing segment consists of products and services that put customers at the center of the experience with our technology. This segment primarily comprises:

•

Devices, including Surface and PC accessories.

PART II

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•

Gaming, including Xbox hardware and Xbox content and services, comprising Xbox Live (transactions, subscriptions, cloud services, and advertising), video games, and third-party video game royalties.

•

Search.

In addition, certain costs incurred at a corporate level that are identifiable and that benefit our segments are allocated to them. These allocated costs include costs of: legal, including settlements and fines; information technology; human resources; finance; excise taxes; field selling; shared facilities services; and customer service and support. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated. Certain corporate-level activity is not allocated to our segments.

Segment revenue and operating income were as follows during the periods presented:

(In millions)


Year Ended June 30,		2020		2019		2018

Revenue

Productivity and Business Processes	$	46,398	$	41,160	$	35,865
Intelligent Cloud		48,366		38,985		32,219
More Personal Computing		48,251		45,698		42,276


Total	$	143,015	$	125,843	$	110,360


Operating Income

Productivity and Business Processes	$	18,724	$	16,219	$	12,924
Intelligent Cloud		18,324		13,920		11,524
More Personal Computing		15,911		12,820		10,610


Total	$	52,959	$	42,959	$	35,058

No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for fiscal years 2020, 2019, or 2018. Revenue, classified by the major geographic areas in which our customers were located, was as follows:

(In millions)


Year Ended June 30,	2020		2019		2018

United States ^(a)	$	73,160	$	64,199	$	55,926
Other countries		69,855		61,644		54,434


Total	$	143,015	$	125,843	$	110,360

(a)	Includes billings to OEMs and certain multinational organizations because of the nature of these businesses and the impracticability of determining the geographic source of the revenue.

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Revenue from external customers, classified by significant product and service offerings, was as follows:

(In millions)


Year Ended June 30,	2020		2019		2018

Server products and cloud services	$	41,379	$	32,622	$	26,129
Office products and cloud services		35,316		31,769		28,316
Windows		22,294		20,395		19,518
Gaming		11,575		11,386		10,353
LinkedIn		8,077		6,754		5,259
Search advertising		7,740		7,628		7,012
Devices		6,457		6,095		5,134
Enterprise Services		6,409		6,124		5,846
Other		3,768		3,070		2,793


Total	$	143,015	$	125,843	$	110,360

Our commercial cloud revenue, which includes Office 365 Commercial, Azure, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties, was $51.7 billion, $38.1 billion and $26.6 billion in fiscal years 2020, 2019, and 2018, respectively. These amounts are primarily included in Office products and cloud services, Server products and cloud services, and LinkedIn in the table above.

(In millions)


June 30,	2020		2019		2018

United States	$	60,789	$	55,252	$	44,501
Ireland		12,734		12,958		12,843
Other countries		29,770		25,422		22,538


Total	$	103,293	$	93,632	$	79,882

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NOTE 20 — QUARTERLY INFORMATION (UNAUDITED)

(In millions, except per share amounts)


Quarter Ended	September 30		December 31		March 31		June 30		Total

Fiscal Year 2020

Revenue	$	33,055	$	36,906	$	35,021	$	38,033	$	143,015
Gross margin		22,649		24,548		24,046		25,694		96,937
Operating income		12,686		13,891		12,975		13,407		52,959
Net income		10,678		11,649		10,752		11,202		44,281
Basic earnings per share		1.40		1.53		1.41		1.48		5.82
Diluted earnings per share		1.38		1.51		1.40		1.46		5.76

Fiscal Year 2019

Revenue		29,084		32,471		30,571		33,717		125,843
Gross margin		19,179		20,048		20,401		23,305		82,933
Operating income		9,955		10,258		10,341		12,405		42,959
Net income ^(a)		8,824		8,420		8,809		13,187		39,240
Basic earnings per share		1.15		1.09		1.15		1.72		5.11
Diluted earnings per share ^(b)		1.14		1.08		1.14		1.71		5.06

(a)

Reflects the $157 million net charge related to the enactment of the TCJA for the second quarter and the $2.6 billion net income tax benefit related to the intangible property transfers for the fourth quarter, which together increased net income by $2.4 billion for fiscal year 2019. See Note 12 – Income Taxes for further information.

(b)	Reflects the net charge related to the enactment of the TCJA and the net income tax benefit related to the intangible property transfers, which decreased (increased) diluted EPS $0.02 for the second quarter, $(0.34) for the fourth quarter, and $(0.31) for fiscal year 2019.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Microsoft Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the "Company") as of June 30, 2020 and 2019, the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity, for each of the three years in the period ended June 30, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 30, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

Critical Audit Matters

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Revenue Recognition – Refer to Note 1 to the financial statements

Critical Audit Matter Description

Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following:

•

The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation.

•

Identification and treatment of contract terms that may impact the timing and amount of revenue recognized (e.g., variable consideration, optional purchases, and free services).

•

Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately.

How the Critical Audit Matter Was Addressed in the Audit

Our principal audit procedures related to the Company's revenue recognition for these customer agreements included the following:

•

We evaluated management's significant accounting policies related to these customer agreements for reasonableness.

•

We selected a sample of customer agreements and performed the following procedures:

–

Obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement.

–

Tested management's identification and treatment of contract terms.

–

•

We evaluated the reasonableness of management's estimate of stand-alone selling prices for products and services that are not sold separately.

•

We tested the mathematical accuracy of management's calculations of revenue and the associated timing of revenue recognized in the financial statements.

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Item 8

Income Taxes – Uncertain Tax Positions – Refer to Note 12 to the financial statements

Critical Audit Matter Description

How the Critical Audit Matter Was Addressed in the Audit

Our principal audit procedures to evaluate management's estimates of uncertain tax positions related to unresolved transfer pricing issues included the following:

•

We tested the reasonableness of management's judgments regarding the future resolution of the uncertain tax positions, including an evaluation of the technical merits of the uncertain tax positions.

•

We evaluated the reasonableness of management's estimates by considering how tax law, including statutes, regulations and case law, impacted management's judgments.

/s/ DELOITTE & TOUCHE LLP

Seattle, Washington

July 30, 2020

We have served as the Company's auditor since 1983.

PART II

Item 9, 9A

YEAR 2019

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INCOME STATEMENTS

(In millions, except per share amounts)


Year Ended June 30,	2019		2018		2017

Revenue:
Product	$	66,069	$	64,497	$	63,811
Service and other		59,774		45,863		32,760


Total revenue		125,843		110,360		96,571


Cost of revenue:
Product		16,273		15,420		15,175
Service and other		26,637		22,933		19,086


Total cost of revenue		42,910		38,353		34,261


Gross margin		82,933		72,007		62,310
Research and development		16,876		14,726		13,037
Sales and marketing		18,213		17,469		15,461
General and administrative		4,885		4,754		4,481
Restructuring		0		0		306


Operating income		42,959		35,058		29,025
Other income, net		729		1,416		876


Income before income taxes		43,688		36,474		29,901
Provision for income taxes		4,448		19,903		4,412


Net income	$	39,240	$	16,571	$	25,489


Earnings per share:
Basic	$	5.11	$	2.15	$	3.29
Diluted	$	5.06	$	2.13	$	3.25


Weighted average shares outstanding:
Basic		7,673		7,700		7,746
Diluted		7,753		7,794		7,832

Refer to accompanying notes.

PART II

Item 8

COMPREHENSIVE INCOME STATEMENTS

(In millions)


Year Ended June 30,	2019			2018			2017

Net income	$	39,240		$	16,571		$	25,489


Other comprehensive income (loss), net of tax:
Net change related to derivatives		(173	)		39			(218	)
Net change related to investments		2,405			(2,717	)		(1,116	)
Translation adjustments and other		(318	)		(178	)		167


Other comprehensive income (loss)		1,914			(2,856	)		(1,167	)


Comprehensive income	$	41,154		$	13,715		$	24,322

Refer to accompanying notes. Refer to Note 18 – Accumulated Other Comprehensive Income (Loss) for further information.

PART II

Item 8

BALANCE SHEETS

(In millions)


June 30,	2019			2018

Assets
Current assets:
Cash and cash equivalents	$	11,356		$	11,946
Short-term investments		122,463			121,822


Total cash, cash equivalents, and short-term investments		133,819			133,768
Accounts receivable, net of allowance for doubtful accounts of $411 and $377		29,524			26,481
Inventories		2,063			2,662
Other		10,146			6,751


Total current assets		175,552			169,662
Property and equipment, net of accumulated depreciation of $35,330 and $29,223		36,477			29,460
Operating lease right-of-use assets		7,379			6,686
Equity investments		2,649			1,862
Goodwill		42,026			35,683
Intangible assets, net		7,750			8,053
Other long-term assets		14,723			7,442


Total assets	$	286,556		$	258,848


Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	9,382		$	8,617
Current portion of long-term debt		5,516			3,998
Accrued compensation		6,830			6,103
Short-term income taxes		5,665			2,121
Short-term unearned revenue		32,676			28,905
Other		9,351			8,744


Total current liabilities		69,420			58,488
Long-term debt		66,662			72,242
Long-term income taxes		29,612			30,265
Long-term unearned revenue		4,530			3,815
Deferred income taxes		233			541
Operating lease liabilities		6,188			5,568
Other long-term liabilities		7,581			5,211


Total liabilities		184,226			176,130


Commitments and contingencies
Stockholders’ equity:
Common stock and paid-in capital – shares authorized 24,000; outstanding 7,643 and 7,677		78,520			71,223
Retained earnings		24,150			13,682
Accumulated other comprehensive loss		(340	)		(2,187	)


Total stockholders’ equity		102,330			82,718


Total liabilities and stockholders’ equity	$	286,556		$	258,848

Refer to accompanying notes.

PART II

Item 8

CASH FLOWS STATEMENTS

(In millions)


Year Ended June 30,	2019			2018			2017

Operations
Net income	$	39,240		$	16,571		$	25,489
Adjustments to reconcile net income to net cash from operations:
Depreciation, amortization, and other		11,682			10,261			8,778
Stock-based compensation expense		4,652			3,940			3,266
Net recognized gains on investments and derivatives		(792	)		(2,212	)		(2,073	)
Deferred income taxes		(6,463	)		(5,143	)		(829	)
Changes in operating assets and liabilities:
Accounts receivable		(2,812	)		(3,862	)		(1,216	)
Inventories		597			(465	)		50
Other current assets		(1,718	)		(952	)		1,028
Other long-term assets		(1,834	)		(285	)		(917	)
Accounts payable		232			1,148			81
Unearned revenue		4,462			5,922			3,820
Income taxes		2,929			18,183			1,792
Other current liabilities		1,419			798			356
Other long-term liabilities		591			(20	)		(118	)


Net cash from operations		52,185			43,884			39,507


Financing
Repayments of short-term debt, maturities of 90 days or less, net		0			(7,324	)		(4,963	)
Proceeds from issuance of debt		0			7,183			44,344
Repayments of debt		(4,000	)		(10,060	)		(7,922	)
Common stock issued		1,142			1,002			772
Common stock repurchased		(19,543	)		(10,721	)		(11,788	)
Common stock cash dividends paid		(13,811	)		(12,699	)		(11,845	)
Other, net		(675	)		(971	)		(190	)


Net cash from (used in) financing		(36,887	)		(33,590	)		8,408


Investing
Additions to property and equipment		(13,925	)		(11,632	)		(8,129	)
Acquisition of companies, net of cash acquired, and purchases of intangible and other assets		(2,388	)		(888	)		(25,944	)
Purchases of investments		(57,697	)		(137,380	)		(176,905	)
Maturities of investments		20,043			26,360			28,044
Sales of investments		38,194			117,577			136,350
Securities lending payable		0			(98	)		(197	)


Net cash used in investing		(15,773	)		(6,061	)		(46,781	)


Effect of foreign exchange rates on cash and cash equivalents		(115	)		50			19


Net change in cash and cash equivalents		(590	)		4,283			1,153
Cash and cash equivalents, beginning of period		11,946			7,663			6,510


Cash and cash equivalents, end of period	$	11,356		$	11,946		$	7,663

Refer to accompanying notes.

PART II

Item 8

STOCKHOLDERS’ EQUITY STATEMENTS

(In millions)


Year Ended June 30,	2019			2018			2017

Common stock and paid-in capital
Balance, beginning of period	$	71,223		$	69,315		$	68,178
Common stock issued		6,829			1,002			772
Common stock repurchased		(4,195	)		(3,033	)		(2,987	)
Stock-based compensation expense		4,652			3,940			3,266
Other, net		11			(1	)		86


Balance, end of period		78,520			71,223			69,315


Retained earnings
Balance, beginning of period		13,682			17,769			13,118
Net income		39,240			16,571			25,489
Common stock cash dividends		(14,103	)		(12,917	)		(12,040	)
Common stock repurchased		(15,346	)		(7,699	)		(8,798	)
Cumulative effect of accounting changes		677			(42	)		0


Balance, end of period		24,150			13,682			17,769


Accumulated other comprehensive income (loss)
Balance, beginning of period		(2,187	)		627			1,794
Other comprehensive income (loss)		1,914			(2,856	)		(1,167	)
Cumulative effect of accounting changes		(67	)		42			0


Balance, end of period		(340	)		(2,187	)		627


Total stockholders’ equity	$	102,330		$	82,718		$	87,711


Cash dividends declared per common share	$	1.84		$	1.68		$	1.56

Refer to accompanying notes.

PART II

Item 8

NOTES TO FINANCIAL STATEMENTS

NOTE 1 — ACCOUNTING POLICIES

Accounting Principles

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

We have recast certain prior period amounts related to investments, derivatives, and fair value measurements to conform to the current period presentation based on our adoption of the new accounting standard for financial instruments. We have recast prior period commercial cloud revenue to include the commercial portion of LinkedIn to provide a comparable view of our commercial cloud business performance. The commercial portion of LinkedIn includes LinkedIn Recruiter, Sales Navigator, premium business subscriptions, and other services for organizations. We have also recast components of the prior period deferred income tax assets and liabilities to conform to the current period presentation. The recast of these prior period amounts had no impact on our consolidated balance sheets, consolidated income statements, or net cash from or used in operating, financing, or investing on our consolidated cash flows statements.

Principles of Consolidation

The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated.

Estimates and Assumptions

Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples of estimates and assumptions include: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price (“SSP”) of performance obligations, variable consideration, and other obligations such as product returns and refunds; loss contingencies; product warranties; the fair value of and/or potential impairment of goodwill and intangible assets for our reporting units; product life cycles; useful lives of our tangible and intangible assets; allowances for doubtful accounts; the market value of, and demand for, our inventory; stock-based compensation forfeiture rates; when technological feasibility is achieved for our products; the potential outcome of uncertain tax positions that have been recognized on our consolidated financial statements or tax returns; and determining the timing and amount of impairments for investments. Actual results and outcomes may differ from management’s estimates and assumptions.

Foreign Currencies

Revenue

Product Revenue and Service and Other Revenue

Service and other revenue includes sales from cloud-based solutions that provide customers with software, services, platforms, and content such as Microsoft Office 365, Microsoft Azure, Microsoft Dynamics 365, and Xbox Live; solution support; and consulting services. Service and other revenue also includes sales from online advertising and LinkedIn.

PART II

Item 8

Revenue Recognition

Nature of Products and Services

Refer to Note 20 – Segment Information and Geographic Data for further information, including revenue by significant product and service offering.

Significant Judgments

PART II

Item 8

Contract Balances

As of June 30, 2019 and 2018, long-term accounts receivable, net of allowance for doubtful accounts, was $2.2 billion and $1.8 billion, respectively, and is included in other long-term assets in our consolidated balance sheets.

Activity in the allowance for doubtful accounts was as follows:

(In millions)


Year Ended June 30,		2019			2018			2017

Balance, beginning of period	$	397		$	361		$	409
Charged to costs and other		153			134			58
Write-offs		(116	)		(98	)		(106	)


Balance, end of period	$	434		$	397		$	361

Allowance for doubtful accounts included in our consolidated balance sheets:

(In millions)


June 30,		2019		2018		2017

Accounts receivable, net of allowance for doubtful accounts	$	411	$	377	$	345
Other long-term assets		23		20		16


Total	$	434	$	397	$	361

PART II

Item 8

Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include SA and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for consulting services to be performed in the future; LinkedIn subscriptions; Office 365 subscriptions; Xbox Live subscriptions; Windows 10 post-delivery support; Dynamics business solutions; Skype prepaid credits and subscriptions; and other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service.

Refer to Note 14 – Unearned Revenue for further information, including unearned revenue by segment and changes in unearned revenue during the period.

Assets Recognized from Costs to Obtain a Contract with a Customer

Cost of Revenue

Product Warranty

PART II

Item 8

Research and Development

Sales and Marketing

Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel, and the costs of advertising, promotions, trade shows, seminars, and other programs. Advertising costs are expensed as incurred. Advertising expense was $1.6 billion, $1.6 billion, and $1.5 billion in fiscal years 2019, 2018, and 2017, respectively.

Stock-Based Compensation

Compensation expense for the employee stock purchase plan (“ESPP”) is measured as the discount the employee is entitled to upon purchase and is recognized in the period of purchase.

Income Taxes

Financial Instruments

Investments

PART II

Item 8

Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding other-than-temporary impairments, are recorded in OCI. Debt investments are impaired when a decline in fair value is judged to be other-than-temporary. Fair value is calculated based on publicly available market information or other estimates determined by management. We employ a systematic methodology on a quarterly basis that considers available quantitative and qualitative evidence in evaluating potential impairment of our investments. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the duration and extent to which the fair value is less than cost. We also evaluate whether we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery. In addition, we consider specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in other income (expense), net and a new cost basis in the investment is established.

Equity investments with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method, or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). We perform a qualitative assessment on a quarterly basis and recognize an impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in value are recorded in other income (expense), net.

We lend certain fixed-income and equity securities to increase investment returns. These transactions are accounted for as secured borrowings and the loaned securities continue to be carried as investments on our consolidated balance sheets. Cash and/or security interests are received as collateral for the loaned securities with the amount determined based upon the underlying security lent and the creditworthiness of the borrower. Cash received is recorded as an asset with a corresponding liability.

Derivatives

For derivative instruments designated as fair value hedges, gains and losses are recognized in other income (expense), net with offsetting gains and losses on the hedged items.

For derivative instruments designated as cash flow hedges, the effective portion of the gains and losses are initially reported as a component of OCI and subsequently recognized in revenue when the hedged exposure is recognized in revenue. Gains and losses on derivatives representing either hedge components excluded from the assessment of effectiveness or hedge ineffectiveness are recognized in other income (expense), net.

For derivative instruments that are not designated as hedges, gains and losses from changes in fair values are primarily recognized in other income (expense), net.

Fair Value Measurements

•

PART II

Item 8

•

Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies. Our Level 2 investments include commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Our Level 2 derivative assets and liabilities primarily include certain over-the-counter option and swap contracts.

•

Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 assets and liabilities include investments in corporate notes and bonds, and goodwill and intangible assets, when they are recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities.

Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.

Inventories

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation, and depreciated using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. The estimated useful lives of our property and equipment are generally as follows: computer software developed or acquired for internal use, three to seven years; computer equipment, two to three years; buildings and improvements, five to 15 years; leasehold improvements, three to 20 years; and furniture and equipment, one to 10 years. Land is not depreciated.

Leases

PART II

Item 8

Goodwill

Intangible Assets

Recent Accounting Guidance

Recently Adopted Accounting Guidance

Income Taxes – Intra-Entity Asset Transfers

In October 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance requiring an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset has been sold to an outside party. We adopted the guidance effective July 1, 2018. Adoption of the guidance was applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. We recorded a net cumulative-effect adjustment that resulted in an increase in retained earnings of $557 million, which reversed the previous deferral of income tax consequences and recorded new deferred tax assets from intra-entity transfers involving assets other than inventory, partially offset by a U.S. deferred tax liability related to global intangible low-taxed income (“GILTI”). Adoption of the standard resulted in an increase in long-term deferred tax assets of $2.8 billion, an increase in long-term deferred tax liabilities of $2.1 billion, and a reduction in other current assets of $152 million. Adoption of the standard had no impact on cash from or used in operating, financing, or investing on our consolidated cash flows statements.

Financial Instruments – Recognition, Measurement, Presentation, and Disclosure

We adopted the standard effective July 1, 2018. Adoption of the standard was applied using a modified retrospective approach through a cumulative-effect adjustment from accumulated other comprehensive income (“AOCI”) to retained earnings as of the effective date, and we elected to measure equity investments without readily determinable fair values at cost with adjustments for observable changes in price or impairments. The cumulative-effect adjustment included any previously held unrealized gains and losses held in AOCI related to our equity investments carried at fair value as well as the impact of recording the fair value of certain equity investments carried at cost. The impact on our consolidated balance sheets upon adoption was not material. Adoption of the standard had no impact on cash from or used in operating, financing, or investing on our consolidated cash flows statements.

PART II

Item 8

Recent Accounting Guidance Not Yet Adopted

Financial Instruments – Targeted Improvements to Accounting for Hedging Activities

In August 2017, the FASB issued new guidance related to accounting for hedging activities. This guidance expands strategies that qualify for hedge accounting, changes how many hedging relationships are presented in the financial statements, and simplifies the application of hedge accounting in certain situations. The standard will be effective for us beginning July 1, 2019, with early adoption permitted for any interim or annual period before the effective date. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. We evaluated the impact of this standard on our consolidated financial statements, including accounting policies, processes, and systems, and do not expect the impact to be material upon adoption.

Financial Instruments – Credit Losses

In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We will be required to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The standard will be adopted upon the effective date for us beginning July 1, 2020. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align our credit loss methodology with the new standard. We are currently evaluating the impact of this standard on our consolidated financial statements, including accounting policies, processes, and systems.

NOTE 2 — EARNINGS PER SHARE

The components of basic and diluted EPS were as follows:

(In millions, except earnings per share)


Year Ended June 30,	2019		2018		2017

Net income available for common shareholders (A)	$	39,240	$	16,571	$	25,489

Weighted average outstanding shares of common stock (B)		7,673		7,700		7,746
Dilutive effect of stock-based awards		80		94		86


Common stock and common stock equivalents (C)		7,753		7,794		7,832


Earnings Per Share

Basic (A/B)	$	5.11	$	2.15	$	3.29
Diluted (A/C)	$	5.06	$	2.13	$	3.25

Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.

PART II

Item 8

NOTE 3 — OTHER INCOME (EXPENSE), NET

The components of other income (expense), net were as follows:

(In millions)


Year Ended June 30,	2019			2018			2017

Interest and dividends income	$	2,762		$	2,214		$	1,387
Interest expense		(2,686	)		(2,733	)		(2,222	)
Net recognized gains on investments		648			2,399			2,583
Net gains (losses) on derivatives		144			(187	)		(510	)
Net losses on foreign currency remeasurements		(82	)		(218	)		(111	)
Other, net		(57	)		(59	)		(251	)


Total	$	729		$	1,416		$	876

Net Recognized Gains (Losses) on Investments

Net recognized gains (losses) on debt investments were as follows:

(In millions)


Year Ended June 30,	2019			2018			2017

Realized gains from sales of available-for-sale securities	$	12		$	27		$	108
Realized losses from sales of available-for-sale securities		(93	)		(987	)		(162	)
Other-than-temporary impairments of investments		(16	)		(6	)		(14	)


Total	$	(97	)	$	(966	)	$	(68	)

Net recognized gains (losses) on equity investments were as follows:

(In millions)


Year Ended June 30,	2019			2018			2017

Net realized gains on investments sold	$	276		$	3,406		$	2,692
Net unrealized gains on investments still held		479			0			0
Impairments of investments		(10	)		(41	)		(41	)


Total	$	745		$	3,365		$	2,651

PART II

Item 8

NOTE 4 — INVESTMENTS

Investment Components

The components of investments were as follows:

(In millions)	Fair Value Level		Cost Basis		Unrealized Gains		Unrealized Losses			Recorded Basis			Cash and Cash Equivalents		Short-term Investments			Equity Investments


June 30, 2019

Changes in Fair Value Recorded in Other Comprehensive Income

Commercial paper		Level 2	$	2,211	$	0	$	0		$	2,211		$	1,773	$	438		$	0
Certificates of deposit		Level 2		2,018		0		0			2,018			1,430		588			0
U.S. government securities		Level 1		104,925		1,854		(104	)		106,675			769		105,906			0
U.S. agency securities		Level 2		988		0		0			988			698		290			0
Foreign government bonds		Level 2		6,350		4		(8	)		6,346			2,506		3,840			0
Mortgage- and asset-backed securities		Level 2		3,554		10		(3	)		3,561			0		3,561			0
Corporate notes and bonds		Level 2		7,437		111		(7	)		7,541			0		7,541			0
Corporate notes and bonds		Level 3		15		0		0			15			0		15			0
Municipal securities		Level 2		242		48		0			290			0		290			0
Municipal securities		Level 3		7		0		0			7			0		7			0


Total debt investments			$	127,747	$	2,027	$	(122	)	$	129,652		$	7,176	$	122,476		$	0


Changes in Fair Value Recorded in Net Income

Equity investments		Level 1								$	973		$	409	$	0		$	564
Equity investments		Other									2,085			0		0			2,085


Total equity investments										$	3,058		$	409	$	0		$	2,649

Cash										$	3,771		$	3,771	$	0		$	0
Derivatives, net^(a)											(13	)		0		(13	)		0


Total										$	136,468		$	11,356	$	122,463		$	2,649

PART II

Item 8

(In millions)	Fair Value Level		Cost Basis		Unrealized Gains		Unrealized Losses			Recorded Basis		Cash and Cash Equivalents		Short-term Investments		Equity Investments


June 30, 2018

Changes in Fair Value Recorded in Other Comprehensive Income

Commercial paper		Level 2	$	2,513	$	0	$	0		$	2,513	$	2,215	$	298	$	0
Certificates of deposit		Level 2		2,058		0		0			2,058		1,865		193		0
U.S. government securities		Level 1		108,120		62		(1,167	)		107,015		2,280		104,735		0
U.S. agency securities		Level 2		1,742		0		0			1,742		1,398		344		0
Foreign government bonds		Level 1		22		0		0			22		0		22		0
Foreign government bonds		Level 2		5,063		1		(10	)		5,054		0		5,054		0
Mortgage- and asset-backed securities		Level 2		3,864		4		(13	)		3,855		0		3,855		0
Corporate notes and bonds		Level 2		6,929		21		(56	)		6,894		0		6,894		0
Corporate notes and bonds		Level 3		15		0		0			15		0		15		0
Municipal securities		Level 2		271		37		(1	)		307		0		307		0


Total debt investments			$	130,597	$	125	$	(1,247	)	$	129,475	$	7,758	$	121,717	$	0


Equity investments		Level 1								$	533	$	246	$	0	$	287
Equity investments		Level 3									18		0		0		18
Equity investments		Other									1,558		0		1		1,557


Total equity investments										$	2,109	$	246	$	1	$	1,862


Cash										$	3,942	$	3,942	$	0	$	0
Derivatives, net^(a)											104		0		104		0


Total										$	135,630	$	11,946	$	121,822	$	1,862

(a)	Refer to Note 5 – Derivatives for further information on the fair value of our derivative instruments.

Equity investments presented as “Other” in the tables above include investments without readily determinable fair values measured using the equity method or measured at cost with adjustments for observable changes in price or impairments, and investments measured at fair value using net asset value as a practical expedient which are not categorized in the fair value hierarchy. As of June 30, 2019 and 2018, equity investments without readily determinable fair values measured at cost with adjustments for observable changes in price or impairments were $1.2 billion and $697 million, respectively.

As of June 30, 2019, we had no collateral received under agreements for loaned securities. As of June 30, 2018, collateral received under agreements for loaned securities was $1.8 billion and primarily comprised U.S. government and agency securities.

Unrealized Losses on Debt Investments

Debt investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows:

	Less than 12 Months					12 Months or Greater							Total Unrealized Losses


(In millions)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Total Fair Value


June 30, 2019

U.S. government and agency securities	$	1,491	$	(1	)	$	39,158	$	(103	)	$	40,649	$	(104	)
Foreign government bonds		25		0			77		(8	)		102		(8	)
Mortgage- and asset-backed securities		664		(1	)		378		(2	)		1,042		(3	)
Corporate notes and bonds		498		(3	)		376		(4	)		874		(7	)


Total	$	2,678	$	(5	)	$	39,989	$	(117	)	$	42,667	$	(122	)

PART II

Item 8

	Less than 12 Months					12 Months or Greater							Total Unrealized Losses


(In millions)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Total Fair Value


June 30, 2018

U.S. government and agency securities	$	82,352	$	(1,064	)	$	4,459	$	(103	)	$	86,811	$	(1,167	)
Foreign government bonds		3,457		(7	)		13		(3	)		3,470		(10	)
Mortgage- and asset-backed securities		2,072		(9	)		96		(4	)		2,168		(13	)
Corporate notes and bonds		3,111		(43	)		301		(13	)		3,412		(56	)
Municipal securities		45		(1	)		0		0			45		(1	)


Total	$	91,037	$	(1,124	)	$	4,869	$	(123	)	$	95,906	$	(1,247	)

Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Management does not believe any remaining unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence.

Debt Investment Maturities

(In millions)	Cost Basis		Estimated Fair Value


June 30, 2019

Due in one year or less	$	53,200	$	53,124
Due after one year through five years		47,016		47,783
Due after five years through 10 years		26,658		27,824
Due after 10 years		873		921


Total	$	127,747	$	129,652

NOTE 5 — DERIVATIVES

We use derivative instruments to manage risks related to foreign currencies, equity prices, interest rates, and credit; to enhance investment returns; and to facilitate portfolio diversification. Our objectives for holding derivatives include reducing, eliminating, and efficiently managing the economic impact of these exposures as effectively as possible. Our derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment.

Foreign Currency

Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency hedge positions. Option and forward contracts are used to hedge a portion of forecasted international revenue and are designated as cash flow hedging instruments. Principal currencies hedged include the euro, Japanese yen, British pound, Canadian dollar, and Australian dollar.

Foreign currency risks related to certain non-U.S. dollar denominated securities are hedged using foreign exchange forward contracts that are designated as fair value hedging instruments.

Equity

Securities held in our equity investments portfolio are subject to market price risk. Market price risk is managed relative to broad-based global and domestic equity indices using certain convertible preferred investments, options, futures, and swap contracts not designated as hedging instruments. In the past, to hedge our price risk, we also used and designated equity derivatives as hedging instruments, including puts, calls, swaps, and forwards.

PART II

Item 8

Other

Interest Rate

Credit

Credit-Risk-Related Contingent Features

Certain of our counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the standard convention related to over-the-counter derivatives. As of June 30, 2019, our long-term unsecured debt rating was AAA, and cash investments were in excess of $1.0 billion. As a result, no collateral was required to be posted.

The following table presents the notional amounts of our outstanding derivative instruments measured in U.S. dollar equivalents:

(In millions)	June 30, 2019		June 30, 2018


Designated as Hedging Instruments

Foreign exchange contracts sold	$	6,034	$	11,101

Not Designated as Hedging Instruments

Foreign exchange contracts purchased		14,889		9,425
Foreign exchange contracts sold		15,614		13,374
Equity contracts purchased		680		49
Equity contracts sold		5		5
Other contracts purchased		1,327		878
Other contracts sold		451		472

PART II

Item 8

Fair Values of Derivative Instruments

The following table presents our derivative instruments:

	Derivative			Derivative				Derivative				Derivative
(In millions)	Assets			Liabilities				Assets				Liabilities


	June 30, 2019							June 30, 2018

Changes in Fair Value Recorded in Other Comprehensive Income

Designated as Hedging Instruments

Foreign exchange contracts	$	0			$	0			$	174			$	0

Changes in Fair Value Recorded in Net Income

Designated as Hedging Instruments

Foreign exchange contracts		0				(93	)			95				0

Not Designated as Hedging Instruments

Foreign exchange contracts		204				(172	)			256				(197	)
Equity contracts		38				0				2				(7	)
Other contracts		8				(7	)			11				(3	)


Gross amounts of derivatives		250				(272	)			538				(207	)
Gross amounts of derivatives offset in the balance sheet		(113	)			114				(152	)			153
Cash collateral received		0				(78	)			0				(235	)


Net amounts of derivatives	$	137			$	(236	)		$	386			$	(289	)

Reported as

Short-term investments	$	(13	)		$	0			$	104			$	0
Other current assets		146				0				260				0
Other long-term assets		4				0				22				0
Other current liabilities		0				(221	)			0				(288	)
Other long-term liabilities		0				(15	)			0				(1	)


Total	$	137			$	(236	)		$	386			$	(289	)

Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $247 million and $272 million, respectively, as of June 30, 2019, and $533 million and $207 million, respectively, as of June 30, 2018.

The following table presents the fair value of our derivatives instruments on a gross basis:

(In millions)	Level 1				Level 2		Level 3		Total


June 30, 2019

Derivative assets	$	0		$	247		$	3	$	250
Derivative liabilities		0			(272	)		0		(272	)

June 30, 2018

Derivative assets		1			535			2		538
Derivative liabilities		(1	)		(206	)		0		(207	)

PART II

Item 8

Fair Value Hedge Gains (Losses)

We recognized in other income (expense), net the following gains (losses) on contracts designated as fair value hedges and their related hedged items:

(In millions)


Year Ended June 30,	2019		2018			2017

Foreign Exchange Contracts

Derivatives	$	38	$	25		$	441
Hedged items		130		78			(386	)


Total amount of ineffectiveness	$	168	$	103		$	55


Equity Contracts

Derivatives	$	0	$	(324	)	$	(74	)
Hedged items		0		324			74


Total amount of ineffectiveness	$	0	$	0		$	0


Amount of equity contracts excluded from effectiveness assessment	$	0	$	80		$	(80	)

Cash Flow Hedge Gains (Losses)

We recognized the following gains (losses) on foreign exchange contracts designated as cash flow hedges:

(In millions)


Year Ended June 30,	2019			2018			2017

Effective Portion

Gains recognized in other comprehensive income (loss), net of tax of $1, $11, and $4	$	159		$	219		$	328
Gains reclassified from accumulated other comprehensive income (loss) into revenue		341			185			555

Amount Excluded from Effectiveness Assessment and Ineffective Portion

Losses recognized in other income (expense), net		(64	)		(255	)		(389	)

We do not have any net derivative gains included in AOCI as of June 30, 2019 that will be reclassified into earnings within the following 12 months. No significant amounts of gains (losses) were reclassified from AOCI into earnings as a result of forecasted transactions that failed to occur during fiscal year 2019.

Non-designated Derivative Gains (Losses)

We recognized in other income (expense), net the following gains (losses) on derivatives not designated as hedging instruments:

(In millions)


Year Ended June 30,	2019			2018			2017

Foreign exchange contracts	$	(97	)	$	(33	)	$	(117	)
Equity contracts		3			(87	)		(114	)
Other contracts		35			(17	)		(3	)


Total	$	(59	)	$	(137	)	$	(234	)

PART II

Item 8

NOTE 6 — INVENTORIES

The components of inventories were as follows:

(In millions)


June 30,	2019		2018

Raw materials	$	399	$	655
Work in process		53		54
Finished goods		1,611		1,953


Total	$	2,063	$	2,662

NOTE 7 — PROPERTY AND EQUIPMENT

The components of property and equipment were as follows:

(In millions)


June 30,	2019			2018

Land	$	1,540		$	1,254
Buildings and improvements		26,288			20,604
Leasehold improvements		5,316			4,735
Computer equipment and software		33,823			27,633
Furniture and equipment		4,840			4,457


Total, at cost		71,807			58,683
Accumulated depreciation		(35,330	)		(29,223	)


Total, net	$	36,477		$	29,460

During fiscal years 2019, 2018, and 2017, depreciation expense was $9.7 billion, $7.7 billion, and $6.1 billion, respectively. We have committed $4.0 billion for the construction of new buildings, building improvements, and leasehold improvements as of June 30, 2019.

NOTE 8 — BUSINESS COMBINATIONS

GitHub, Inc.

PART II

Item 8

The allocation of the purchase price to goodwill was completed as of June 30, 2019. The major classes of assets and liabilities to which we allocated the purchase price were as follows:

(In millions)


Cash, cash equivalents, and short-term investments	$	234
Goodwill		5,497
Intangible assets		1,267
Other assets		143
Other liabilities		(217	)


Total	$	6,924

Following are the details of the purchase price allocated to the intangible assets acquired:

(In millions)	Amount		Weighted Average Life


Customer-related	$	648		8 years
Technology-based		447		5 years
Marketing-related		170		10 years
Contract-based		2		2 years


Total	$	1,267		7 years

Transactions recognized separately from the purchase price allocation were approximately $600 million, primarily related to equity awards recognized as expense over the related service period.

LinkedIn Corporation

On December 8, 2016, we completed our acquisition of all issued and outstanding shares of LinkedIn Corporation (“LinkedIn”), the world’s largest professional network on the Internet, for a total purchase price of $27.0 billion. The purchase price consisted primarily of cash of $26.9 billion. The acquisition is expected to accelerate the growth of LinkedIn, Office 365, and Dynamics 365. The financial results of LinkedIn have been included in our consolidated financial statements since the date of the acquisition.

PART II

Item 8

The allocation of the purchase price to goodwill was completed as of June 30, 2017. The major classes of assets and liabilities to which we allocated the purchase price were as follows:

(In millions)


Cash and cash equivalents	$	1,328
Short-term investments		2,110
Other current assets		697
Property and equipment		1,529
Intangible assets		7,887
Goodwill ⁽^a⁾		16,803
Short-term debt ^(b)		(1,323	)
Other current liabilities		(1,117	)
Deferred income taxes		(774	)
Other		(131	)


Total purchase price	$	27,009

(a)	Goodwill was assigned to our Productivity and Business Processes segment. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of LinkedIn. None of the goodwill is expected to be deductible for income tax purposes.

(b)

Convertible senior notes issued by LinkedIn on November 12, 2014, substantially all of which were redeemed after our acquisition of LinkedIn. The remaining $18 million of notes are not redeemable and are included in long-term debt in our consolidated balance sheets. Refer to Note 11 – Debt for further information.

Following are the details of the purchase price allocated to the intangible assets acquired:

(In millions)	Amount		Weighted Average Life


Customer-related	$	3,607		7 years
Marketing-related (trade names)		2,148		20 years
Technology-based		2,109		3 years
Contract-based		23		5 years


Fair value of intangible assets acquired	$	7,887		9 years

Our consolidated income statements include the following revenue and operating loss attributable to LinkedIn since the date of acquisition:

(In millions)


Year Ended June 30,		2017

Revenue	$	2,271
Operating loss		(924	)

Following are the supplemental consolidated financial results of Microsoft Corporation on an unaudited pro forma basis, as if the acquisition had been consummated on July 1, 2015:

(In millions, except per share amounts)


Year Ended June 30,		2017		2016

Revenue	$	98,291	$	94,490
Net income		25,179		19,128
Diluted earnings per share		3.21		2.38

These pro forma results were based on estimates and assumptions, which we believe are reasonable. They are not the results that would have been realized had we been a combined company during the periods presented and are not necessarily indicative of our consolidated results of operations in future periods. The pro forma results include adjustments related to purchase accounting, primarily amortization of intangible assets. Acquisition costs and other nonrecurring charges were immaterial and are included in the earliest period presented.

PART II

Item 8

Other

During fiscal year 2019, we completed 19 additional acquisitions for $1.6 billion, substantially all of which were paid in cash. These entities have been included in our consolidated results of operations since their respective acquisition dates.

NOTE 9 — GOODWILL

Changes in the carrying amount of goodwill were as follows:

(In millions)	June 30, 2017			Acquisitions			Other				June 30, 2018			Acquisitions				Other				June 30, 2019


Productivity and Business Processes		$	23,739		$	72		$	12			$	23,823		$	514			$	(60	)		$	24,277
Intelligent Cloud			5,555			164			(16	)			5,703			5,605	^(a)			43	^(a)			11,351
More Personal Computing			5,828			394			(65	)			6,157			289				(48	)			6,398


Total		$	35,122		$	630		$	(69	)		$	35,683		$	6,408			$	(65	)		$	42,026

(a)	Includes goodwill of $5.5 billion related to GitHub. See Note 8 – Business Combinations for further information.

Goodwill Impairment

No instances of impairment were identified in our May 1, 2019, May 1, 2018, or May 1, 2017 tests. As of June 30, 2019 and 2018, accumulated goodwill impairment was $11.3 billion.

NOTE 10 — INTANGIBLE ASSETS

The components of intangible assets, all of which are finite-lived, were as follows:

(In millions)	Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount


June 30,							2019							2018

Technology-based	$	7,691		$	(5,771	)	$	1,920	$	7,220	$	(5,018	)	$	2,202
Customer-related		4,709			(1,785	)		2,924		4,031		(1,205	)		2,826
Marketing-related		4,165			(1,327	)		2,838		4,006		(1,071	)		2,935
Contract-based		574			(506	)		68		679		(589	)		90


Total	$	17,139	^(a)	$	(9,389	)	$	7,750	$	15,936	$	(7,883	)	$	8,053

(a)	Includes intangible assets of $1.3 billion related to GitHub. See Note 8 – Business Combinations for further information.

No material impairments of intangible assets were identified during fiscal years 2019, 2018, or 2017. We estimate that we have no significant residual value related to our intangible assets.

PART II

Item 8

The components of intangible assets acquired during the periods presented were as follows:

(In millions)	Amount		Weighted Average Life		Amount		Weighted Average Life


Year Ended June 30,	2019				2018

Technology-based	$	814		5 years	$	178		4 years
Marketing-related		177		10 years		14		5 years
Contract-based		7		3 years		14		4 years
Customer-related		710		8 years		13		5 years


Total	$	1,708		7 years	$	219		5 years

Intangible assets amortization expense was $1.9 billion, $2.2 billion, and $1.7 billion for fiscal years 2019, 2018, and 2017, respectively.

The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2019:

(In millions)


Year Ending June 30,

2020	$	1,488
2021		1,282
2022		1,187
2023		1,053
2024		737
Thereafter		2,003


Total	$	7,750

NOTE 11 — DEBT

Short-term Debt

As of June 30, 2019 and 2018, we had no commercial paper issued or outstanding. Effective August 31, 2018, we terminated our credit facilities, which served as back-up for our commercial paper program.

Long-term Debt

As of June 30, 2019, the total carrying value and estimated fair value of our long-term debt, including the current portion, were $72.2 billion and $78.9 billion, respectively. As of June 30, 2018, the total carrying value and estimated fair value of our long-term debt, including the current portion, were $76.2 billion and $77.5 billion, respectively. These estimated fair values are based on Level 2 inputs.

PART II

Item 8

The components of our long-term debt, including the current portion, and the associated interest rates were as follows:

(In millions, except interest rates)	Face Value June 30, 2019		Face Value June 30, 2018		Stated Interest Rate	Effective Interest Rate


Notes

November 3, 2018	$	0	$	1,750	1.300%	1.396%
December 6, 2018		0		1,250	1.625%	1.824%
June 1, 2019		0		1,000	4.200%	4.379%
August 8, 2019		2,500		2,500	1.100%	1.203%
November 1, 2019		18		18	0.500%	0.500%
February 6, 2020		1,500		1,500	1.850%	1.952%
February 12, 2020		1,500		1,500	1.850%	1.935%
October 1, 2020		1,000		1,000	3.000%	3.137%
November 3, 2020		2,250		2,250	2.000%	2.093%
February 8, 2021		500		500	4.000%	4.082%
August 8, 2021		2,750		2,750	1.550%	1.642%
December 6, 2021 ^(a)		1,994		2,044	2.125%	2.233%
February 6, 2022		1,750		1,750	2.400%	2.520%
February 12, 2022		1,500		1,500	2.375%	2.466%
November 3, 2022		1,000		1,000	2.650%	2.717%
November 15, 2022		750		750	2.125%	2.239%
May 1, 2023		1,000		1,000	2.375%	2.465%
August 8, 2023		1,500		1,500	2.000%	2.101%
December 15, 2023		1,500		1,500	3.625%	3.726%
February 6, 2024		2,250		2,250	2.875%	3.041%
February 12, 2025		2,250		2,250	2.700%	2.772%
November 3, 2025		3,000		3,000	3.125%	3.176%
August 8, 2026		4,000		4,000	2.400%	2.464%
February 6, 2027		4,000		4,000	3.300%	3.383%
December 6, 2028 ^(a)		1,993		2,044	3.125%	3.218%
May 2, 2033 ^(a)		626		642	2.625%	2.690%
February 12, 2035		1,500		1,500	3.500%	3.604%
November 3, 2035		1,000		1,000	4.200%	4.260%
August 8, 2036		2,250		2,250	3.450%	3.510%
February 6, 2037		2,500		2,500	4.100%	4.152%
June 1, 2039		750		750	5.200%	5.240%
October 1, 2040		1,000		1,000	4.500%	4.567%
February 8, 2041		1,000		1,000	5.300%	5.361%
November 15, 2042		900		900	3.500%	3.571%
May 1, 2043		500		500	3.750%	3.829%
December 15, 2043		500		500	4.875%	4.918%
February 12, 2045		1,750		1,750	3.750%	3.800%
November 3, 2045		3,000		3,000	4.450%	4.492%
August 8, 2046		4,500		4,500	3.700%	3.743%
February 6, 2047		3,000		3,000	4.250%	4.287%
February 12, 2055		2,250		2,250	4.000%	4.063%
November 3, 2055		1,000		1,000	4.750%	4.782%
August 8, 2056		2,250		2,250	3.950%	4.033%
February 6, 2057		2,000		2,000	4.500%	4.528%


Total	$	72,781	$	76,898

(a)	Euro-denominated debt securities.

The notes in the table above are senior unsecured obligations and rank equally with our other senior unsecured debt outstanding. Interest on these notes is paid semi-annually, except for the euro-denominated debt securities on which interest is paid annually. Cash paid for interest on our debt for fiscal years 2019, 2018, and 2017 was $2.4 billion, $2.4 billion, and $1.6 billion, respectively. As of June 30, 2019 and 2018, the aggregate debt issuance costs and unamortized discount associated with our long-term debt, including the current portion, were $603 million and $658 million, respectively.

PART II

Item 8

Maturities of our long-term debt for each of the next five years and thereafter are as follows:

(In millions)


Year Ending June 30,

2020	$	5,518
2021		3,750
2022		7,994
2023		2,750
2024		5,250
Thereafter		47,519


Total	$	72,781

NOTE 12 — INCOME TAXES

Tax Cuts and Jobs Act

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law, which significantly changed existing U.S. tax law and included numerous provisions that affect our business, such as imposing a one-time transition tax on deemed repatriation of deferred foreign income, reducing the U.S. federal statutory tax rate, and adopting a territorial tax system. In fiscal year 2018, the TCJA required us to incur a transition tax on deferred foreign income not previously subject to U.S. income tax at a rate of 15.5% for foreign cash and certain other net current assets, and 8% on the remaining income. The TCJA reduced the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018. In addition, the TCJA subjected us to a tax on our GILTI effective July 1, 2018.

Under GAAP, we can make an accounting policy election to either treat taxes due on the GILTI inclusion as a current period expense or factor such amounts into our measurement of deferred taxes. We elected the deferred method, under which we recorded the corresponding deferred tax assets and liabilities on our consolidated balance sheets.

During fiscal year 2018, we recorded a net charge of $13.7 billion related to the enactment of the TCJA, due to the impact of the one-time transition tax on the deemed repatriation of deferred foreign income of $17.9 billion, offset in part by the impact of changes in the tax rate of $4.2 billion, primarily on deferred tax assets and liabilities. During the second quarter of fiscal year 2019, we recorded additional tax expense of $157 million, which related to completing our provisional accounting for GILTI deferred taxes pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 118.

In the fourth quarter of fiscal year 2019, in response to the TCJA and recently issued regulations, we transferred certain intangible properties held by our foreign subsidiaries to the U.S. and Ireland. The transfers of intangible properties resulted in a $2.6 billion net income tax benefit recorded in the fourth quarter of fiscal year 2019, as the value of future tax deductions exceeded the current tax liability from foreign jurisdictions and U.S. GILTI tax.

PART II

Item 8

Provision for Income Taxes

The components of the provision for income taxes were as follows:

(In millions)


Year Ended June 30,	2019			2018			2017

Current Taxes

U.S. federal	$	4,718		$	19,764		$	2,739
U.S. state and local		662			934			30
Foreign		5,531			4,348			2,472


Current taxes	$	10,911		$	25,046		$	5,241

Deferred Taxes

U.S. federal	$	(5,647	)	$	(4,292	)	$	(554	)
U.S. state and local		(1,010	)		(458	)		269
Foreign		194			(393	)		(544	)


Deferred taxes	$	(6,463	)	$	(5,143	)	$	(829	)


Provision for income taxes	$	4,448		$	19,903		$	4,412

U.S. and foreign components of income before income taxes were as follows:

(In millions)


Year Ended June 30,	2019		2018		2017

U.S.	$	15,799	$	11,527	$	6,843
Foreign		27,889		24,947		23,058


Income before income taxes	$	43,688	$	36,474	$	29,901

Effective Tax Rate

The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows:



Year Ended June 30,	2019		2018		2017

Federal statutory rate		21.0%		28.1%		35.0%
Effect of:
Foreign earnings taxed at lower rates		(4.1)%		(7.8)%		(11.6)%
Impact of the enactment of the TCJA		0.4%		37.7%		0%
Phone business losses		0%		0%		(5.7)%
Impact of intangible property transfers		(5.9)%		0%		0%
Foreign-derived intangible income deduction		(1.4)%		0%		0%
Research and development credit		(1.1)%		(1.3)%		(0.9)%
Excess tax benefits relating to stock-based compensation		(2.2)%		(2.5)%		(2.1)%
Interest, net		1.0%		1.2%		1.4%
Other reconciling items, net		2.5%		(0.8)%		(1.3)%


Effective rate		10.2%		54.6%		14.8%

PART II

Item 8

The decrease from the federal statutory rate in fiscal year 2019 is primarily due to a $2.6 billion net income tax benefit related to intangible property transfers, and earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland, Singapore, and Puerto Rico. The increase from the federal statutory rate in fiscal year 2018 is primarily due to the net charge related to the enactment of the TCJA in the second quarter of fiscal year 2018, offset in part by earnings taxed at lower rates in foreign jurisdictions. The decrease from the federal statutory rate in fiscal year 2017 is primarily due to earnings taxed at lower rates in foreign jurisdictions. Our foreign regional operating centers in Ireland, Singapore and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated 82%, 87%, and 76% of our foreign income before tax in fiscal years 2019, 2018, and 2017, respectively. Other reconciling items, net consists primarily of tax credits, GILTI, and U.S. state income taxes. In fiscal years 2019, 2018, and 2017, there were no individually significant other reconciling items.

The decrease in our effective tax rate for fiscal year 2019 compared to fiscal year 2018 was primarily due to the net charge related to the enactment of the TCJA in the second quarter of fiscal year 2018, and a $2.6 billion net income tax benefit in the fourth quarter of fiscal year 2019 related to intangible property transfers. The increase in our effective tax rate for fiscal year 2018 compared to fiscal year 2017 was primarily due to the net charge related to the enactment of the TCJA and the realization of tax benefits attributable to previous Phone business losses in fiscal year 2017.

The components of the deferred income tax assets and liabilities were as follows:

(In millions)


June 30,	2019				2018

Deferred Income Tax Assets

Stock-based compensation expense	$		406		$		460
Accruals, reserves, and other expenses			2,287				1,832
Loss and credit carryforwards			3,518				3,369
Depreciation and amortization			7,046				351
Leasing liabilities			1,594				1,427
Unearned revenue			475				0
Other			367				56


Deferred income tax assets			15,693				7,495
Less valuation allowance			(3,214	)			(3,186	)


Deferred income tax assets, net of valuation allowance	$		12,479		$		4,309


Deferred Income Tax Liabilities

Unrealized gain on investments and debt	$	(738		)	$	0
Unearned revenue		(30		)		(639		)
Depreciation and amortization		0				(1,164		)
Leasing assets		(1,510		)		(1,366		)
Deferred GILTI tax liabilities		(2,607		)		(61		)
Other		(291		)		(251		)


Deferred income tax liabilities	$	(5,176		)	$	(3,481		)


Net deferred income tax assets (liabilities)	$	7,303			$	828


Reported As

Other long-term assets	$	7,536			$	1,369
Long-term deferred income tax liabilities		(233		)		(541		)


Net deferred income tax assets (liabilities)	$	7,303			$	828

PART II

Item 8

As of June 30, 2019, we had federal, state and foreign net operating loss carryforwards of $978 million, $770 million, and $11.6 billion, respectively. The federal and state net operating loss carryforwards will expire in various years from fiscal 2020 through 2039, if not utilized. The majority of our foreign net operating loss carryforwards do not expire. Certain acquired net operating loss carryforwards are subject to an annual limitation, but are expected to be realized with the exception of those which have a valuation allowance.

The valuation allowance disclosed in the table above relates to the foreign net operating loss carryforwards and other net deferred tax assets that may not be realized.

Income taxes paid, net of refunds, were $8.4 billion, $5.5 billion, and $2.4 billion in fiscal years 2019, 2018, and 2017, respectively.

Uncertain Tax Positions

Gross unrecognized tax benefits related to uncertain tax positions as of June 30, 2019, 2018, and 2017, were $13.1 billion, $12.0 billion, and $11.7 billion, respectively, which were primarily included in long-term income taxes in our consolidated balance sheets. If recognized, the resulting tax benefit would affect our effective tax rates for fiscal years 2019, 2018, and 2017 by $12.0 billion, $11.3 billion, and $10.2 billion, respectively.

As of June 30, 2019, 2018, and 2017, we had accrued interest expense related to uncertain tax positions of $3.4 billion, $3.0 billion, and $2.3 billion, respectively, net of income tax benefits. The provision for (benefit from) income taxes for fiscal years 2019, 2018, and 2017 included interest expense related to uncertain tax positions of $515 million, $688 million, and $399 million, respectively, net of income tax benefits.

The aggregate changes in the gross unrecognized tax benefits related to uncertain tax positions were as follows:

(In millions)


Year Ended June 30,	2019			2018			2017

Beginning unrecognized tax benefits	$	11,961		$	11,737		$	10,164
Decreases related to settlements		(316	)		(193	)		(4	)
Increases for tax positions related to the current year		2,106			1,445			1,277
Increases for tax positions related to prior years		508			151			397
Decreases for tax positions related to prior years		(1,113	)		(1,176	)		(49	)
Decreases due to lapsed statutes of limitations		0			(3	)		(48	)


Ending unrecognized tax benefits	$	13,146		$	11,961		$	11,737

We settled a portion of the Internal Revenue Service (“IRS”) audit for tax years 2004 to 2006 in fiscal year 2011. In February 2012, the IRS withdrew its 2011 Revenue Agents Report related to unresolved issues for tax years 2004 to 2006 and reopened the audit phase of the examination. We also settled a portion of the IRS audit for tax years 2007 to 2009 in fiscal year 2016, and a portion of the IRS audit for tax years 2010 to 2013 in fiscal year 2018. We remain under audit for tax years 2004 to 2013. We expect the IRS to begin an examination of tax years 2014 to 2017 within the next 12 months.

As of June 30, 2019, the primary unresolved issues for the IRS audits relate to transfer pricing, which could have a material impact on our consolidated financial statements when the matters are resolved. We believe our allowances for income tax contingencies are adequate. We have not received a proposed assessment for the unresolved issues and do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months.

We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years 1996 to 2018, some of which are currently under audit by local tax authorities. The resolution of each of these audits is not expected to be material to our consolidated financial statements.

NOTE 13 — RESTRUCTURING CHARGES

In June 2017, management approved a sales and marketing restructuring plan. In fiscal year 2017, we recorded employee severance expenses of $306 million primarily related to this sales and marketing restructuring plan. The actions associated with this restructuring plan were completed as of June 30, 2018.

PART II

Item 8

NOTE 14 — UNEARNED REVENUE

Unearned revenue by segment was as follows:

(In millions)


June 30,	2019		2018

Productivity and Business Processes	$	16,831	$	14,864
Intelligent Cloud		16,988		14,706
More Personal Computing		3,387		3,150


Total	$	37,206	$	32,720

Changes in unearned revenue were as follows:

(In millions)


Year Ended June 30, 2019

Balance, beginning of period	$	32,720
Deferral of revenue		69,493
Recognition of unearned revenue		(65,007	)


Balance, end of period	$	37,206

Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized (“contracted not recognized revenue”), which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted not recognized revenue was $91 billion as of June 30, 2019, of which we expect to recognize approximately 50% of the revenue over the next 12 months and the remainder thereafter. Many customers are committing to our products and services for longer contract terms, which is increasing the percentage of contracted revenue that will be recognized beyond the next 12 months.

NOTE 15 — LEASES

The components of lease expense were as follows:

(In millions)


Year Ended June 30,	2019			2018		2017

Operating lease cost	$	1,707	$	1,585	$	1,412


Finance lease cost:
Amortization of right-of-use assets	$	370	$	243	$	104
Interest on lease liabilities		247		175		68


Total finance lease cost	$	617	$	418	$	172

PART II

Item 8

Supplemental cash flow information related to leases was as follows:

(In millions)


Year Ended June 30,	2019			2018		2017

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,670	$	1,522	$	1,157
Operating cash flows from finance leases		247		175		68
Financing cash flows from finance leases		221		144		46

Right-of-use assets obtained in exchange for lease obligations:
Operating leases		2,303		1,571		1,270
Finance leases		2,532		1,933		1,773

Supplemental balance sheet information related to leases was as follows:

(In millions, except lease term and discount rate)


June 30,	2019			2018

Operating Leases

Operating lease right-of-use assets	$	7,379		$	6,686


Other current liabilities	$	1,515		$	1,399
Operating lease liabilities		6,188			5,568


Total operating lease liabilities	$	7,703		$	6,967


Finance Leases

Property and equipment, at cost	$	7,041		$	4,543
Accumulated depreciation		(774	)		(404	)


Property and equipment, net	$	6,267		$	4,139


Other current liabilities	$	317		$	176
Other long-term liabilities		6,257			4,125


Total finance lease liabilities	$	6,574		$	4,301

Weighted Average Remaining Lease Term

Operating leases		7 years			7 years
Finance leases		13 years			13 years

Weighted Average Discount Rate

Operating leases		3.0%			2.7%
Finance leases		4.6%			5.2%

Maturities of lease liabilities were as follows:

(In millions)


Year Ending June 30,	Operating Leases			Finance Leases

2020	$	1,678		$	591
2021		1,438			616
2022		1,235			626
2023		1,036			631
2024		839			641
Thereafter		2,438			5,671


Total lease payments		8,664			8,776
Less imputed interest		(961	)		(2,202	)


Total	$	7,703		$	6,574

PART II

Item 8

As of June 30, 2019, we have additional operating and finance leases, primarily for datacenters, that have not yet commenced of $2.3 billion and $6.1 billion, respectively. These operating and finance leases will commence between fiscal year 2020 and fiscal year 2022 with lease terms of 1 year to 15 years.

NOTE 16 — CONTINGENCIES

Patent and Intellectual Property Claims

There were 44 patent infringement cases pending against Microsoft as of June 30, 2019, none of which are material individually or in aggregate.

Antitrust, Unfair Competition, and Overcharge Class Actions

Other Antitrust Litigation and Claims

China State Administration for Industry and Commerce Investigation

In 2014, Microsoft was informed that China’s State Agency for Market Regulation (“SAMR”) (formerly State Administration for Industry and Commerce) had begun a formal investigation relating to China’s Anti-Monopoly Law, and the SAMR conducted onsite inspections of Microsoft offices in Beijing, Shanghai, Guangzhou, and Chengdu. The SAMR has presented its preliminary views as to certain possible violations of China's Anti-Monopoly Law, and discussions are expected to continue.

Product-Related Litigation

U.S. Cell Phone Litigation

In 2013, the defendants in the consolidated cases moved to exclude the plaintiffs’ expert evidence of general causation on the basis of flawed scientific methodologies. In 2014, the trial court granted in part and denied in part the defendants’ motion to exclude the plaintiffs’ general causation experts. The defendants filed an interlocutory appeal to the District of Columbia Court of Appeals challenging the standard for evaluating expert scientific evidence. In October 2016, the Court of Appeals issued its decision adopting the standard advocated by the defendants and remanding the cases to the trial court for further proceedings under that standard. The plaintiffs have filed supplemental expert evidence, portions of which the defendants have moved to strike. In August 2018, the trial court issued an order striking portions of the plaintiffs’ expert reports. A hearing is expected to be scheduled in the second half of calendar year 2019.

PART II

Item 8

Employment-Related Litigation

Moussouris v. Microsoft

Current and former female Microsoft employees in certain engineering and information technology roles brought this class action in federal court in Seattle in 2015, alleging systemic gender discrimination in pay and promotions. The plaintiffs moved to certify the class in October 2017. Microsoft filed an opposition in January 2018, attaching an expert report showing no statistically significant disparity in pay and promotions between similarly situated men and women. In June 2018, the court denied the plaintiffs’ motion for class certification. Plaintiffs sought an interlocutory appeal to the U.S. Court of Appeals for the Ninth Circuit, which was granted in September 2018. Oral argument is scheduled for October 2019.

Other Contingencies

We also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact on our consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.

As of June 30, 2019, we accrued aggregate legal liabilities of $386 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $1.0 billion in aggregate beyond recorded amounts are reasonably possible. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact on our consolidated financial statements for the period in which the effects become reasonably estimable.

NOTE 17 — STOCKHOLDERS’ EQUITY

Shares Outstanding

Shares of common stock outstanding were as follows:

(In millions)


Year Ended June 30,	2019			2018			2017

Balance, beginning of year		7,677			7,708			7,808
Issued		116			68			70
Repurchased		(150	)		(99	)		(170	)


Balance, end of year		7,643			7,677			7,708

Share Repurchases

On September 16, 2013, our Board of Directors approved a share repurchase program (“2013 Share Repurchase Program”) authorizing up to $40.0 billion in share repurchases. The 2013 Share Repurchase Program became effective on October 1, 2013, and was completed on December 22, 2016.

On September 20, 2016, our Board of Directors approved a share repurchase program authorizing up to an additional $40.0 billion in share repurchases (“2016 Share Repurchase Program”). This share repurchase program commenced on December 22, 2016 following completion of the 2013 Share Repurchase Program, has no expiration date, and may be suspended or discontinued at any time without notice. As of June 30, 2019, $11.4 billion remained of the 2016 Share Repurchase Program.

PART II

Item 8

We repurchased the following shares of common stock under the share repurchase programs:

(In millions)	Shares		Amount		Shares		Amount		Shares		Amount


Year Ended June 30,	2019				2018				2017

First Quarter		24	$	2,600		22	$	1,600		63	$	3,550
Second Quarter		57		6,100		22		1,800		59		3,533
Third Quarter		36		3,899		34		3,100		25		1,600
Fourth Quarter		33		4,200		21		2,100		23		1,600


Total		150	$	16,799		99	$	8,600		170	$	10,283

Shares repurchased in the first and second quarter of fiscal year 2017 were under the 2013 Share Repurchase Program. All other shares repurchased were under the 2016 Share Repurchase Program. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards of $2.7 billion, $2.1 billion, and $1.5 billion for fiscal years 2019, 2018, and 2017, respectively. All share repurchases were made using cash resources.

Dividends

Our Board of Directors declared the following dividends:

Declaration Date	Record Date		Payment Date		Dividend Per Share			Amount


Fiscal Year 2019								(In millions)

September 18, 2018		November 15, 2018		December 13, 2018		$	0.46	$	3,544
November 28, 2018		February 21, 2019		March 14, 2019			0.46		3,526
March 11, 2019		May 16, 2019		June 13, 2019			0.46		3,521
June 12, 2019		August 15, 2019		September 12, 2019			0.46		3,516


Total						$	1.84	$	14,107

Fiscal Year 2018

September 19, 2017		November 16, 2017		December 14, 2017		$	0.42	$	3,238
November 29, 2017		February 15, 2018		March 8, 2018			0.42		3,232
March 12, 2018		May 17, 2018		June 14, 2018			0.42		3,226
June 13, 2018		August 16, 2018		September 13, 2018			0.42		3,220


Total						$	1.68	$	12,916

The dividend declared on June 12, 2019 was included in other current liabilities as of June 30, 2019.

PART II

Item 8

NOTE 18 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes in accumulated other comprehensive income (loss) by component:

(In millions)


Year Ended June 30,	2019			2018			2017

Derivatives

Balance, beginning of period	$	173		$	134		$	352
Unrealized gains, net of tax of $2, $11, and $4		160			218			328
Reclassification adjustments for gains included in revenue		(341	)		(185	)		(555	)
Tax expense included in provision for income taxes		8			6			9


Amounts reclassified from accumulated other comprehensive income (loss)		(333	)		(179	)		(546	)


Net change related to derivatives, net of tax of $(6), $5, and $(5)		(173	)		39			(218	)


Balance, end of period	$	0		$	173		$	134


Investments

Balance, beginning of period	$	(850	)	$	1,825		$	2,941
Unrealized gains (losses), net of tax of $616, $(427), and $267		2,331			(1,146	)		517
Reclassification adjustments for (gains) losses included in other income (expense), net		93			(2,309	)		(2,513	)
Tax expense (benefit) included in provision for income taxes		(19	)		738			880


Amounts reclassified from accumulated other comprehensive income (loss)		74			(1,571	)		(1,633	)


Net change related to investments, net of tax of $635, $(1,165), and $(613)		2,405			(2,717	)		(1,116	)
Cumulative effect of accounting changes		(67	)		42			0


Balance, end of period	$	1,488		$	(850	)	$	1,825


Translation Adjustments and Other

Balance, beginning of period	$	(1,510	)	$	(1,332	)	$	(1,499	)
Translation adjustments and other, net of tax effects of $(1), $0, and $9		(318	)		(178	)		167


Balance, end of period	$	(1,828	)	$	(1,510	)	$	(1,332	)


Accumulated other comprehensive income (loss), end of period	$	(340	)	$	(2,187	)	$	627

NOTE 19 — EMPLOYEE STOCK AND SAVINGS PLANS

We grant stock-based compensation to employees and directors. As of June 30, 2019, an aggregate of 327 million shares were authorized for future grant under our stock plans. Awards that expire or are canceled without delivery of shares generally become available for issuance under the plans. We issue new shares of Microsoft common stock to satisfy vesting of awards granted under our stock plans. We also have an ESPP for all eligible employees.

Stock-based compensation expense and related income tax benefits were as follows:

(In millions)


Year Ended June 30,	2019		2018		2017

Stock-based compensation expense	$	4,652	$	3,940	$	3,266
Income tax benefits related to stock-based compensation		816		823		1,066

PART II

Item 8

Stock Plans

Stock awards entitle the holder to receive shares of Microsoft common stock as the award vests. Stock awards generally vest over a four or five-year service period.

Executive Incentive Plan

Under the Executive Incentive Plan, the Compensation Committee approves stock awards to executive officers and certain senior executives. RSUs generally vest ratably over a four-year service period. PSUs generally vest over a three-year performance period. The number of shares the PSU holder receives is based on the extent to which the corresponding performance goals have been achieved.

Activity for All Stock Plans

The fair value of stock awards was estimated on the date of grant using the following assumptions:



Year Ended June 30,	2019		2018		2017

Dividends per share (quarterly amounts)		$0.42 - $0.46		$0.39 - $0.42		$0.36 - $0.39
Interest rates		1.8% - 3.1%		1.7% - 2.9%		1.2% - 2.2%

During fiscal year 2019, the following activity occurred under our stock plans:

Shares			Weighted Average Grant-Date Fair Value


(In millions)

Stock Awards

Nonvested balance, beginning of year	174		$	57.85
Granted ^(a)	63			107.02
Vested	(77	)		57.08
Forfeited	(13	)		69.35


Nonvested balance, end of year	147		$	78.49

(a)	Includes 2 million, 3 million, and 2 million of PSUs granted at target and performance adjustments above target levels for fiscal years 2019, 2018, and 2017, respectively.

As of June 30, 2019, there was approximately $8.6 billion of total unrecognized compensation costs related to stock awards. These costs are expected to be recognized over a weighted average period of 3 years. The weighted average grant-date fair value of stock awards granted was $107.02, $75.88, and $55.64 for fiscal years 2019, 2018, and 2017, respectively. The fair value of stock awards vested was $8.7 billion, $6.6 billion, and $4.8 billion, for fiscal years 2019, 2018, and 2017, respectively.

Employee Stock Purchase Plan

(Shares in millions)


Year Ended June 30,	2019		2018		2017

Shares purchased		11		13		13
Average price per share	$	104.85	$	76.40	$	56.36

As of June 30, 2019, 105 million shares of our common stock were reserved for future issuance through the ESPP.

PART II

Item 8

Savings Plan

We have savings plans in the U.S. that qualify under Section 401(k) of the Internal Revenue Code, and a number of savings plans in international locations. Eligible U.S. employees may contribute a portion of their salary into the savings plans, subject to certain limitations. We contribute fifty cents for each dollar a participant contributes into the plans, with a maximum employer contribution of 50% of the IRS contribution limit for the calendar year. Employer-funded retirement benefits for all plans were $877 million, $807 million, and $734 million in fiscal years 2019, 2018, and 2017, respectively, and were expensed as contributed.

NOTE 20 — SEGMENT INFORMATION AND GEOGRAPHIC DATA

Our reportable segments are described below.

Productivity and Business Processes

•

Office Commercial, including Office 365 subscriptions and Office licensed on-premises, comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, and Skype for Business, and related Client Access Licenses (“CALs”).

•

Office Consumer, including Office 365 subscriptions and Office licensed on-premises, and Office Consumer Services, including Skype, Outlook.com, and OneDrive.

•

LinkedIn, including Talent Solutions, Marketing Solutions, and Premium Subscriptions.

•

Dynamics business solutions, including Dynamics 365, a set of cloud-based applications across ERP and CRM, Dynamics ERP on-premises, and Dynamics CRM on-premises.

Intelligent Cloud

Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business. This segment primarily comprises:

•

Server products and cloud services, including Microsoft SQL Server, Windows Server, Visual Studio, System Center, and related CALs, GitHub, and Azure.

•

Enterprise Services, including Premier Support Services and Microsoft Consulting Services.

More Personal Computing

Our More Personal Computing segment consists of products and services geared towards harmonizing the interests of end users, developers, and IT professionals across all devices. This segment primarily comprises:

•

Devices, including Microsoft Surface, PC accessories, and other intelligent devices.

•

Gaming, including Xbox hardware and Xbox software and services, comprising Xbox Live transactions, subscriptions, cloud services, and advertising (“Xbox Live”), video games, and third-party video game royalties.

•

Search.

PART II

Item 8

Segment revenue and operating income were as follows during the periods presented:

(In millions)


Year Ended June 30,		2019		2018		2017

Revenue

Productivity and Business Processes	$	41,160	$	35,865	$	29,870
Intelligent Cloud		38,985		32,219		27,407
More Personal Computing		45,698		42,276		39,294


Total	$	125,843	$	110,360	$	96,571


Operating Income (Loss)

Productivity and Business Processes	$	16,219	$	12,924	$	11,389
Intelligent Cloud		13,920		11,524		9,127
More Personal Computing		12,820		10,610		8,815
Corporate and Other		0		0		(306	)


Total	$	42,959	$	35,058	$	29,025

Corporate and Other operating loss comprised restructuring expenses.

No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for fiscal years 2019, 2018, or 2017. Revenue, classified by the major geographic areas in which our customers were located, was as follows:

(In millions)


Year Ended June 30,	2019		2018		2017

United States ^(a)	$	64,199	$	55,926	$	51,078
Other countries		61,644		54,434		45,493


Total	$	125,843	$	110,360	$	96,571

(a)	Includes billings to OEMs and certain multinational organizations because of the nature of these businesses and the impracticability of determining the geographic source of the revenue.

PART II

Item 8

Revenue from external customers, classified by significant product and service offerings, was as follows:

(In millions)


Year Ended June 30,	2019		2018		2017

Server products and cloud services	$	32,622	$	26,129	$	21,649
Office products and cloud services		31,769		28,316		25,573
Windows		20,395		19,518		18,593
Gaming		11,386		10,353		9,051
Search advertising		7,628		7,012		6,219
LinkedIn		6,754		5,259		2,271
Enterprise Services		6,124		5,846		5,542
Devices		6,095		5,134		5,062
Other		3,070		2,793		2,611


Total	$	125,843	$	110,360	$	96,571

Our commercial cloud revenue, which includes Office 365 Commercial, Azure, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties, was $38.1 billion, $26.6 billion and $16.2 billion in fiscal years 2019, 2018, and 2017, respectively. These amounts are primarily included in Office products and cloud services, Server products and cloud services, and LinkedIn in the table above.

Assets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment; it is impracticable for us to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss.

(In millions)


June 30,	2019		2018		2017

United States	$	55,252	$	44,501	$	42,730
Ireland		12,958		12,843		12,889
Other countries		25,422		22,538		19,898


Total	$	93,632	$	79,882	$	75,517

PART II

Item 8

NOTE 21 — QUARTERLY INFORMATION (UNAUDITED)

(In millions, except per share amounts)


Quarter Ended	September 30		December 31		March 31		June 30		Total

Fiscal Year 2019

Revenue	$	29,084	$	32,471	$	30,571	$	33,717	$	125,843
Gross margin		19,179		20,048		20,401		23,305		82,933
Operating income		9,955		10,258		10,341		12,405		42,959
Net income ^(a)		8,824		8,420		8,809		13,187		39,240
Basic earnings per share		1.15		1.09		1.15		1.72		5.11
Diluted earnings per share ^(b)		1.14		1.08		1.14		1.71		5.06

Fiscal Year 2018

Revenue	$	24,538	$	28,918		$	26,819	$	30,085	$	110,360
Gross margin		16,260		17,854			17,550		20,343		72,007
Operating income		7,708		8,679			8,292		10,379		35,058
Net income (loss) ⁽^c⁾		6,576		(6,302	)		7,424		8,873		16,571
Basic earnings (loss) per share		0.85		(0.82	)		0.96		1.15		2.15
Diluted earnings (loss) per share ⁽^d⁾		0.84		(0.82	)		0.95		1.14		2.13

(a)

(b)	Reflects the net charge related to the enactment of the TCJA and the net income tax benefit related to the intangible property transfers, which decreased (increased) diluted EPS $0.02 for the second quarter, $(0.34) for the fourth quarter, and $(0.31) for fiscal year 2019.

(c)	Reflects the net charge (benefit) related to the enactment of the TCJA of $13.8 billion for the second quarter, $(104) million for the fourth quarter, and $13.7 billion for fiscal year 2018.

(d)	Reflects the net charge (benefit) related to the enactment of the TCJA, which decreased (increased) diluted EPS $1.78 for the second quarter, $(0.01) for the fourth quarter, and $1.75 for fiscal year 2018.

PART II

Item 8

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Microsoft Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the “Company”) as of June 30, 2019 and 2018, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows, for each of the three years in the period ended June 30, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 1, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the Company’s Audit Committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

PART II

Item 8

Revenue Recognition — Refer to Note 1 to the Financial Statements

Critical Audit Matter Description

Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following:

•

Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately.

•

The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation.

•

Estimation of variable consideration when determining the amount of revenue to recognize (e.g., customer credits, incentives, and in certain instances, estimation of customer usage of products and services).

Given these factors, the related audit effort in evaluating management’s judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment.

How the Critical Audit Matter Was Addressed in the Audit

Our principal audit procedures related to the Company’s revenue recognition for these customer agreements included the following:

•

We tested the effectiveness of internal controls related to the identification of distinct performance obligations, the determination of the timing of revenue recognition, and the estimation of variable consideration.

•

We evaluated management’s significant accounting policies related to these customer agreements for reasonableness.

•

We selected a sample of customer agreements and performed the following procedures:

•

Obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement.

•

Tested management’s identification of significant terms for completeness, including the identification of distinct performance obligations and variable consideration.

•

Assessed the terms in the customer agreement and evaluated the appropriateness of management’s application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions.

•

We evaluated the reasonableness of management’s estimate of stand-alone selling prices for products and services that are not sold separately.

•

We tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the financial statements.

PART II

Item 8

Income Taxes — Uncertain Tax Positions — Refer to Note 12 to the Financial Statements

Critical Audit Matter Description

The Company’s long-term income taxes liability includes uncertain tax positions related to transfer pricing issues that remain unresolved with the Internal Revenue Service (“IRS”). The Company remains under IRS audit, or subject to IRS audit, for tax years subsequent to 2003. While the Company has settled a portion of the IRS audits, resolution of the remaining matters could have a material impact on the Company’s financial statements.

Conclusions on recognizing and measuring uncertain tax positions involve significant estimates and management judgment and include complex considerations of the Internal Revenue Code, related regulations, tax case laws, and prior-year audit settlements. Given the complexity and the subjective nature of the transfer pricing issues that remain unresolved with the IRS, evaluating management’s estimates relating to their determination of uncertain tax positions required extensive audit effort and a high degree of auditor judgment, including involvement of our tax specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our principal audit procedures to evaluate management’s estimates of uncertain tax positions related to unresolved transfer pricing issues included the following:

•

We evaluated the appropriateness and consistency of management’s methods and assumptions used in the identification, recognition, measurement, and disclosure of uncertain tax positions, which included testing the effectiveness of the related internal controls.

•

We read and evaluated management’s documentation, including relevant accounting policies and information obtained by management from outside tax specialists, that detailed the basis of the uncertain tax positions.

•

We tested the reasonableness of management’s judgments regarding the future resolution of the uncertain tax positions, including an evaluation of the technical merits of the uncertain tax positions.

•

We evaluated the reasonableness of management’s estimates by considering how tax law, including statutes, regulations and case law, impacted management’s judgments.

/s/ DELOITTE & TOUCHE LLP

Seattle, Washington

August 1, 2019

We have served as the Company’s auditor since 1983.

PART II

Item 9, 9A

YEAR 2018

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INCOME STATEMENTS

(In millions, except per share amounts)


Year Ended June 30,	2018		2017		2016

Revenue:
Product	$	64,497	$	63,811	$	67,336
Service and other		45,863		32,760		23,818


Total revenue		110,360		96,571		91,154


Cost of revenue:
Product		15,420		15,175		17,880
Service and other		22,933		19,086		14,900


Total cost of revenue		38,353		34,261		32,780


Gross margin		72,007		62,310		58,374
Research and development		14,726		13,037		11,988
Sales and marketing		17,469		15,461		14,635
General and administrative		4,754		4,481		4,563
Impairment and restructuring		0		306		1,110


Operating income		35,058		29,025		26,078
Other income (expense), net		1,416		876		(439	)


Income before income taxes		36,474		29,901		25,639
Provision for income taxes		19,903		4,412		5,100


Net income	$	16,571	$	25,489	$	20,539


Earnings per share:
Basic	$	2.15	$	3.29	$	2.59
Diluted	$	2.13	$	3.25	$	2.56


Weighted average shares outstanding:
Basic		7,700		7,746		7,925
Diluted		7,794		7,832		8,013


Cash dividends declared per common share	$	1.68	$	1.56	$	1.44

Refer to accompanying notes.

PART II

Item 8

COMPREHENSIVE INCOME STATEMENTS

(In millions)


Year Ended June 30,	2018			2017			2016

Net income	$	16,571		$	25,489		$	20,539


Other comprehensive income (loss), net of tax:
Net change related to derivatives		39			(218	)		(238	)
Net change related to investments		(2,717	)		(1,116	)		(228	)
Translation adjustments and other		(178	)		167			(262	)


Other comprehensive loss		(2,856	)		(1,167	)		(728	)


Comprehensive income	$	13,715		$	24,322		$	19,811

Refer to accompanying notes. Refer to Note 19 – Accumulated Other Comprehensive Income (Loss) for further information.

PART II

Item 8

BALANCE SHEETS

(In millions)


June 30,	2018			2017

Assets
Current assets:
Cash and cash equivalents	$	11,946		$	7,663
Short-term investments		121,822			125,318


Total cash, cash equivalents, and short-term investments		133,768			132,981
Accounts receivable, net of allowance for doubtful accounts of $377 and $345		26,481			22,431
Inventories		2,662			2,181
Other		6,751			5,103


Total current assets		169,662			162,696
Property and equipment, net of accumulated depreciation of $29,223 and $24,179		29,460			23,734
Operating lease right-of-use assets		6,686			6,555
Equity and other investments		1,862			6,023
Goodwill		35,683			35,122
Intangible assets, net		8,053			10,106
Other long-term assets		7,442			6,076


Total assets	$	258,848		$	250,312


Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	8,617		$	7,390
Short-term debt		0			9,072
Current portion of long-term debt		3,998			1,049
Accrued compensation		6,103			5,819
Short-term income taxes		2,121			718
Short-term unearned revenue		28,905			24,013
Other		8,744			7,684


Total current liabilities		58,488			55,745
Long-term debt		72,242			76,073
Long-term income taxes		30,265			13,485
Long-term unearned revenue		3,815			2,643
Deferred income taxes		541			5,734
Operating lease liabilities		5,568			5,372
Other long-term liabilities		5,211			3,549


Total liabilities		176,130			162,601


Commitments and contingencies
Stockholders’ equity:
Common stock and paid-in capital – shares authorized 24,000; outstanding 7,677 and 7,708		71,223			69,315
Retained earnings		13,682			17,769
Accumulated other comprehensive income (loss)		(2,187	)		627


Total stockholders’ equity		82,718			87,711


Total liabilities and stockholders’ equity	$	258,848		$	250,312

Refer to accompanying notes.

PART II

Item 8

CASH FLOWS STATEMENTS

(In millions)


Year Ended June 30,	2018			2017			2016

Operations
Net income	$	16,571		$	25,489		$	20,539
Adjustments to reconcile net income to net cash from operations:
Asset impairments		0			0			630
Depreciation, amortization, and other		10,261			8,778			6,622
Stock-based compensation expense		3,940			3,266			2,668
Net recognized gains on investments and derivatives		(2,212	)		(2,073	)		(223	)
Deferred income taxes		(5,143	)		(829	)		2,479
Changes in operating assets and liabilities:
Accounts receivable		(3,862	)		(1,216	)		562
Inventories		(465	)		50			600
Other current assets		(952	)		1,028			(1,212	)
Other long-term assets		(285	)		(917	)		(1,110	)
Accounts payable		1,148			81			88
Unearned revenue		5,922			3,820			2,565
Income taxes		18,183			1,792			(298	)
Other current liabilities		798			356			(179	)
Other long-term liabilities		(20	)		(118	)		(406	)


Net cash from operations		43,884			39,507			33,325


Financing
Proceeds from issuance (repayments) of short-term debt, maturities of 90 days or less, net		(7,324	)		(4,963	)		7,195
Proceeds from issuance of debt		7,183			44,344			13,884
Repayments of debt		(10,060	)		(7,922	)		(2,796	)
Common stock issued		1,002			772			668
Common stock repurchased		(10,721	)		(11,788	)		(15,969	)
Common stock cash dividends paid		(12,699	)		(11,845	)		(11,006	)
Other, net		(971	)		(190	)		(369	)


Net cash from (used in) financing		(33,590	)		8,408			(8,393	)


Investing
Additions to property and equipment		(11,632	)		(8,129	)		(8,343	)
Acquisition of companies, net of cash acquired, and purchases of intangible and other assets		(888	)		(25,944	)		(1,393	)
Purchases of investments		(137,380	)		(176,905	)		(129,758	)
Maturities of investments		26,360			28,044			22,054
Sales of investments		117,577			136,350			93,287
Securities lending payable		(98	)		(197	)		203


Net cash used in investing		(6,061	)		(46,781	)		(23,950	)


Effect of foreign exchange rates on cash and cash equivalents		50			19			(67	)


Net change in cash and cash equivalents		4,283			1,153			915
Cash and cash equivalents, beginning of period		7,663			6,510			5,595


Cash and cash equivalents, end of period	$	11,946		$	7,663		$	6,510

Refer to accompanying notes.

PART II

Item 8

STOCKHOLDERS’ EQUITY STATEMENTS

(In millions)


Year Ended June 30,	2018			2017			2016

Common stock and paid-in capital
Balance, beginning of period	$	69,315		$	68,178		$	68,465
Common stock issued		1,002			772			668
Common stock repurchased		(3,033	)		(2,987	)		(3,689	)
Stock-based compensation expense		3,940			3,266			2,668
Other, net		(1	)		86			66


Balance, end of period		71,223			69,315			68,178


Retained earnings
Balance, beginning of period		17,769			13,118			16,191
Net income		16,571			25,489			20,539
Common stock cash dividends		(12,917	)		(12,040	)		(11,329	)
Common stock repurchased		(7,699	)		(8,798	)		(12,283	)
Cumulative effect of accounting change		(42	)		0			0


Balance, end of period		13,682			17,769			13,118


Accumulated other comprehensive income (loss)
Balance, beginning of period		627			1,794			2,522
Other comprehensive loss		(2,856	)		(1,167	)		(728	)
Cumulative effect of accounting change		42			0			0


Balance, end of period		(2,187	)		627			1,794


Total stockholders’ equity	$	82,718		$	87,711		$	83,090

Refer to accompanying notes.

PART II

Item 8

NOTES TO FINANCIAL STATEMENTS

NOTE 1 — ACCOUNTING POLICIES

Accounting Principles

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

We have recast certain prior period income tax liabilities as discussed in the Recent Tax Legislation section below. We have also recast prior period securities lending payables to other current liabilities in our consolidated balance sheets to conform to the current period presentation. These items had no impact in our consolidated income statements or net cash from or used in operating, financing, or investing in our consolidated cash flows statements.

Principles of Consolidation

The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated. Equity investments for which we are able to exercise significant influence over but do not control the investee and are not the primary beneficiary of the investee’s activities are accounted for using the equity method. Investments for which we are not able to exercise significant influence over the investee and which do not have readily determinable fair values are accounted for under the cost method.

Estimates and Assumptions

Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples of estimates and assumptions include: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price (“SSP”) of performance obligations, variable consideration, and other obligations such as product returns and refunds; loss contingencies; product warranties; the fair value of and/or potential impairment of goodwill and intangible assets for our reporting units; product life cycles; useful lives of our tangible and intangible assets; allowances for doubtful accounts; the market value of, and demand for, our inventory; stock-based compensation forfeiture rates; when technological feasibility is achieved for our products; the potential outcome of future tax consequences of events that have been recognized in our consolidated financial statements or tax returns; and determining when investment impairments are other-than-temporary. Actual results and outcomes may differ from management’s estimates and assumptions.

Foreign Currencies

Revenue

Product Revenue and Service and Other Revenue

PART II

Item 8

Revenue Recognition

Nature of Products and Services

Refer to Note 21 – Segment Information and Geographic Data for further information, including revenue by significant product and service offering.

Significant Judgments

PART II

Item 8

Contract Balances

The opening balance of current and long-term accounts receivable, net of allowance for doubtful accounts, was $22.3 billion as of July 1, 2016.

As of June 30, 2018 and 2017, long-term accounts receivable, net of allowance for doubtful accounts, were $1.8 billion and $1.7 billion, respectively, and are included in other long-term assets in our consolidated balance sheets.

Activity in the allowance for doubtful accounts was as follows:

(In millions)


Year Ended June 30,		2018			2017			2016

Balance, beginning of period	$	361		$	409		$	289
Charged to costs and other		134			58			175
Write-offs		(98	)		(106	)		(55	)


Balance, end of period	$	397		$	361		$	409

Allowance for doubtful accounts included in our consolidated balance sheets:



June 30,		2018		2017		2016

Accounts receivable, net of allowance for doubtful accounts	$	377	$	345	$	392
Other long-term assets		20		16		17


Total	$	397	$	361	$	409

PART II

Item 8

Unearned revenue comprises mainly unearned revenue related to volume licensing programs, which may include SA and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for consulting services to be performed in the future; LinkedIn subscriptions; Office 365 subscriptions; Xbox Live subscriptions; Windows 10 post-delivery support; Dynamics business solutions; Skype prepaid credits and subscriptions; and other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service.

Refer to Note 15 – Unearned Revenue for further information, including unearned revenue by segment and changes in unearned revenue during the period.

Assets Recognized from Costs to Obtain a Contract with a Customer

Cost of Revenue

Cost of revenue includes: manufacturing and distribution costs for products sold and programs licensed; operating costs related to product support service centers and product distribution centers; costs incurred to include software on PCs sold by original equipment manufacturers (“OEM”), to drive traffic to our websites, and to acquire online advertising space; costs incurred to support and maintain Internet-based products and services, including datacenter costs and royalties; warranty costs; inventory valuation adjustments; costs associated with the delivery of consulting services; and the amortization of capitalized software development costs. Capitalized software development costs are amortized over the estimated lives of the products.

Product Warranty

PART II

Item 8

Research and Development

Sales and Marketing

Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with sales and marketing personnel, and the costs of advertising, promotions, trade shows, seminars, and other programs. Advertising costs are expensed as incurred. Advertising expense was $1.6 billion, $1.5 billion, and $1.6 billion in fiscal years 2018, 2017, and 2016, respectively.

Stock-Based Compensation

Compensation expense for the employee stock purchase plan (“ESPP”) is measured as the discount the employee is entitled to upon purchase and is recognized in the period of purchase.

Income Taxes

PART II

Item 8

Fair Value Measurements

•

Level 1 – inputs are based upon unadjusted quoted prices for identical instruments in active markets. Our Level 1 non-derivative investments primarily include U.S. government securities, common and preferred stock, and mutual funds. Our Level 1 derivative assets and liabilities include those actively traded on exchanges.

•

Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies. Our Level 2 non-derivative investments consist primarily of corporate notes and bonds, foreign government bonds, mortgage- and asset-backed securities, commercial paper, certificates of deposit, and U.S. agency securities. Our Level 2 derivative assets and liabilities primarily include certain over-the-counter option and swap contracts.

•

Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 non-derivative assets and liabilities primarily comprise investments in common and preferred stock, and goodwill and intangible assets, when they are recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities.

We measure certain assets, including our cost and equity method investments, at fair value on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections. An impairment charge is recorded when the cost of the investment exceeds its fair value and this condition is determined to be other-than-temporary.

Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.

Financial Instruments

Investments

Equity and other investments classified as long-term include both debt and equity instruments. Debt and publicly-traded equity securities are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in the market value of available-for-sale securities, excluding other-than-temporary impairments, are reflected in OCI. Common and preferred stock and other investments that are restricted for more than one year or are not publicly traded are recorded at cost or using the equity method.

PART II

Item 8

We lend certain fixed-income and equity securities to increase investment returns. These transactions are accounted for as secured borrowings and the loaned securities continue to be carried as investments in our consolidated balance sheets. Cash and/or security interests are received as collateral for the loaned securities with the amount determined based upon the underlying security lent and the creditworthiness of the borrower. Cash received is recorded as an asset with a corresponding liability.

Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. Fair value is calculated based on publicly available market information or other estimates determined by management. We employ a systematic methodology on a quarterly basis that considers available quantitative and qualitative evidence in evaluating potential impairment of our investments. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, the duration and extent to which the fair value is less than cost, and for equity securities, our intent and ability to hold, or plans to sell, the investment. For fixed-income securities, we also evaluate whether we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery. We also consider specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded to other income (expense), net and a new cost basis in the investment is established.

Derivatives

Derivative instruments are recognized as either assets or liabilities and are measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.

For derivative instruments designated as fair value hedges, the gains (losses) are recognized in earnings in the periods of change together with the offsetting losses (gains) on the hedged items attributed to the risk being hedged. For options designated as fair value hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in earnings.

For derivative instruments designated as cash flow hedges, the effective portion of the gains (losses) on the derivatives is initially reported as a component of OCI and is subsequently recognized in earnings when the hedged exposure is recognized in earnings. For options designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in earnings. Gains (losses) on derivatives representing either hedge components excluded from the assessment of effectiveness or hedge ineffectiveness are recognized in earnings.

For derivative instruments that are not designated as hedges, gains (losses) from changes in fair values are primarily recognized in other income (expense), net.

Inventories

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation, and depreciated using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. The estimated useful lives of our property and equipment are generally as follows: computer software developed or acquired for internal use, three to seven years; computer equipment, two to three years; buildings and improvements, five to 15 years; leasehold improvements, three to 20 years; and furniture and equipment, one to 10 years. Land is not depreciated.

PART II

Item 8

Leases

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Goodwill

Intangible Assets

All of our intangible assets are subject to amortization and are amortized using the straight-line method over their estimated period of benefit, ranging from one to 20 years. We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.

Recent Tax Legislation

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law, which significantly changes existing U.S. tax law and includes numerous provisions that affect our business. Refer to Note 13 – Income Taxes for further discussion.

PART II

Item 8

As a result of the TCJA, we have recast certain prior period income tax liabilities in our consolidated balance sheets to conform to the current period presentation. Previously reported balances were impacted as follows:

(In millions)	As Previously Reported		As Adjusted


Balance Sheets				June 30, 2017

Long-term income taxes	$	0	$	13,485
Other long-term liabilities		17,034		3,549

These adjustments had no impact in our consolidated income statements or net cash from or used in operating, financing, or investing in our consolidated cash flows statements.

Recent Accounting Guidance

Recently Adopted Accounting Guidance

Comprehensive Income – Reclassification of Certain Tax Effects

In February 2018, the Financial Accounting Standards Board (“FASB”) issued new guidance to allow a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from the TCJA. In the second quarter of fiscal year 2018, we remeasured our deferred taxes related to unrealized gains on our investment balances using the reduced tax rate. As required by GAAP, we recognized the net tax benefit in the provision for income taxes in our consolidated income statements, even though the deferred taxes were initially recognized in AOCI, which resulted in stranded tax effects. We elected to early adopt the standard effective April 1, 2018 and reclassified a $42 million net tax benefit from AOCI to retained earnings in our consolidated balance sheets. Adoption of the standard had no impact to our consolidated income statements or cash flows statements.

Leases

In February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of ROU assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We are also required to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available.

We elected to early adopt the standard effective July 1, 2017 concurrent with our adoption of the new standard related to revenue recognition. We elected the available practical expedients and implemented internal controls and key system functionality to enable the preparation of financial information on adoption.

The standard had a material impact in our consolidated balance sheets, but did not have an impact in our consolidated income statements. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. Adoption of the standard required us to restate certain previously reported results, including the recognition of additional ROU assets and lease liabilities for operating leases. Refer to Impacts to Previously Reported Results below for the impact of adoption of the standard in our consolidated financial statements.

Revenue from Contracts with Customers

In May 2014, the FASB issued a new standard related to revenue recognition. Under the standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

PART II

Item 8

We elected to early adopt the standard effective July 1, 2017, using the full retrospective method, which required us to restate each prior reporting period presented. We implemented internal controls and key system functionality to enable the preparation of financial information on adoption.

The most significant impact of the standard relates to our accounting for software license revenue. Specifically, for Windows 10, we recognize revenue predominantly at the time of billing and delivery rather than ratably over the life of the related device. For certain multi-year commercial software subscriptions that include both distinct software licenses and SA, we recognize license revenue at the time of contract execution rather than over the subscription period. Due to the complexity of certain of our commercial license subscription contracts, the actual revenue recognition treatment required under the standard depends on contract-specific terms and in some instances may vary from recognition at the time of billing. Revenue recognition related to our hardware, cloud offerings (such as Office 365), LinkedIn, and professional services remains substantially unchanged.

Adoption of the standard using the full retrospective method required us to restate certain previously reported results, including the recognition of additional revenue and an increase in the provision for income taxes, primarily due to the net change in Windows 10 revenue recognition. In addition, adoption of the standard resulted in an increase in accounts receivable and other current and long-term assets, driven by unbilled receivables from upfront recognition of revenue for certain multi-year commercial software subscriptions that include both distinct software licenses and SA; a reduction of unearned revenue, driven by the upfront recognition of license revenue from Windows 10 and certain multi-year commercial software subscriptions; and an increase in deferred income taxes, driven by the upfront recognition of revenue. Refer to Impacts to Previously Reported Results below for the impact of adoption of the standard in our consolidated financial statements.

Impacts to Previously Reported Results

Adoption of the standards related to revenue recognition and leases impacted our previously reported results as follows:

(In millions, except per share amounts)	As Previously Reported		New Revenue Standard Adjustment		As Restated


Income Statements

Year Ended June 30, 2017

Revenue	$	89,950	$	6,621	$	96,571
Provision for income taxes		1,945		2,467		4,412
Net income		21,204		4,285		25,489
Diluted earnings per share		2.71		0.54		3.25

Year Ended June 30, 2016

Revenue	$	85,320	$	5,834	$	91,154
Provision for income taxes		2,953		2,147		5,100
Net income		16,798		3,741		20,539
Diluted earnings per share		2.10		0.46		2.56

PART II

Item 8

(In millions)	As Previously Reported		New Revenue Standard Adjustment			New Lease Standard Adjustment		As Restated


Balance Sheets

June 30, 2017

Accounts receivable, net of allowance for doubtful accounts	$	19,792	$	2,639		$	0	$	22,431
Operating lease right-of-use assets		0		0			6,555		6,555
Other current and long-term assets		11,147		32			0		11,179
Unearned revenue		44,479		(17,823	)		0		26,656
Deferred income taxes		531		5,203			0		5,734
Operating lease liabilities		0		0			5,372		5,372
Other current and long-term liabilities		23,464		(26	)		1,183		24,621
Stockholders' equity		72,394		15,317			0		87,711

Adoption of the standards related to revenue recognition and leases had no impact to cash from or used in operating, financing, or investing in our consolidated cash flows statements.

Recent Accounting Guidance Not Yet Adopted

Financial Instruments – Targeted Improvements to Accounting for Hedging Activities

In August 2017, the FASB issued new guidance related to accounting for hedging activities. This guidance expands strategies that qualify for hedge accounting, changes how many hedging relationships are presented in the financial statements, and simplifies the application of hedge accounting in certain situations. The standard will be effective for us beginning July 1, 2019, with early adoption permitted for any interim or annual period before the effective date. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. We are currently evaluating the impact of this standard in our consolidated financial statements, including accounting policies, processes, and systems.

Income Taxes – Intra-Entity Asset Transfers

In October 2016, the FASB issued new guidance requiring an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset has been sold to an outside party. This guidance is effective for us beginning July 1, 2018, with early adoption permitted beginning July 1, 2017. We plan to adopt the guidance effective July 1, 2018. Adoption of the guidance will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. We currently expect a net cumulative-effect adjustment of approximately $550 million, which will reverse the deferral of income tax consequences from past intra-entity transfers involving assets other than inventory and new deferred tax assets for amounts not recognized under current GAAP, partially offset by a U.S. deferred tax liability related to global intangible low-taxed income (“GILTI”). Adoption of the standard is expected to result in an increase in long-term deferred tax assets of $2.8 billion, an increase in long-term deferred tax liabilities of $2.1 billion, and a reduction to other current assets of $150 million. As a result of the TCJA, we are continuing to evaluate the impact of this standard in our consolidated financial statements, including accounting policies, processes, and systems.

Financial Instruments – Credit Losses

In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We will be required to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The standard will be effective for us beginning July 1, 2020, with early adoption permitted beginning July 1, 2019. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align our credit loss methodology with the new standard. We are currently evaluating the impact of this standard in our consolidated financial statements, including accounting policies, processes, and systems.

PART II

Item 8

Financial Instruments – Recognition, Measurement, Presentation, and Disclosure

In January 2016, the FASB issued a new standard related to certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most prominent among the changes in the standard is the requirement for changes in the fair value of our equity investments, with certain exceptions, to be recognized through net income rather than OCI. Under the standard, equity investments that do not have a readily determinable fair value are eligible for the measurement alternative. Using the measurement alternative, investments without readily determinable fair values will be valued at cost, with adjustments for changes in price or impairments reflected through net income.

The standard will be effective for us beginning July 1, 2018. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment from AOCI to retained earnings as of the effective date. A cumulative-effect adjustment will capture any previously held unrealized gains and losses held in AOCI related to our equity investments carried at fair value as well as the impact of recording the fair value of certain equity investments carried at cost. In preparation for adoption of this standard, we have implemented internal controls to align with the new standard and have concluded that we will elect the measurement alternative for equity investments that do not have readily determinable fair values.

The impact in our consolidated balance sheets upon adoption will not be material. Adoption of the standard will have no impact to cash from or used in operating, financing or investing in our consolidated cash flows statements.

NOTE 2 — EARNINGS PER SHARE

The components of basic and diluted EPS were as follows:

(In millions, except earnings per share)


Year Ended June 30,	2018		2017		2016

Net income available for common shareholders (A)	$	16,571	$	25,489	$	20,539

Weighted average outstanding shares of common stock (B)		7,700		7,746		7,925
Dilutive effect of stock-based awards		94		86		88


Common stock and common stock equivalents (C)		7,794		7,832		8,013


Earnings Per Share

Basic (A/B)	$	2.15	$	3.29	$	2.59
Diluted (A/C)	$	2.13	$	3.25	$	2.56

Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.

NOTE 3 — OTHER INCOME (EXPENSE), NET

The components of other income (expense), net were as follows:

(In millions)


Year Ended June 30,	2018			2017			2016

Dividends and interest income	$	2,214		$	1,387		$	903
Interest expense		(2,733	)		(2,222	)		(1,243	)
Net recognized gains on investments		2,399			2,583			668
Net losses on derivatives		(187	)		(510	)		(443	)
Net losses on foreign currency remeasurements		(218	)		(111	)		(129	)
Other, net		(59	)		(251	)		(195	)


Total	$	1,416		$	876		$	(439	)

PART II

Item 8

Following are details of net recognized gains (losses) on investments during the periods reported:

(In millions)


Year Ended June 30,	2018			2017			2016

Other-than-temporary impairments of investments	$	(47	)	$	(55	)	$	(322	)
Realized gains from sales of available-for-sale securities		3,478			3,064			1,376
Realized losses from sales of available-for-sale securities		(1,032	)		(426	)		(386	)


Total	$	2,399		$	2,583		$	668

NOTE 4 — INVESTMENTS

Investment Components

The components of investments, including associated derivatives, were as follows:

(In millions)	Cost Basis		Unrealized Gains		Unrealized Losses			Recorded Basis		Cash and Cash Equivalents		Short-term Investments		Equity and Other Investments


June 30, 2018

Cash	$	3,942	$	0	$	0		$	3,942	$	3,942	$	0	$	0
Mutual funds		246		0		0			246		246		0		0
Commercial paper		2,513		0		0			2,513		2,215		298		0
Certificates of deposit		2,058		0		0			2,058		1,865		193		0
U.S. government and agency securities		109,862		62		(1,167	)		108,757		3,678		105,079		0
Foreign government bonds		5,182		1		(10	)		5,173		0		5,173		0
Mortgage- and asset-backed securities		3,868		4		(13	)		3,859		0		3,859		0
Corporate notes and bonds		6,947		21		(56	)		6,912		0		6,912		0
Municipal securities		271		37		(1	)		307		0		307		0
Common and preferred stock		1,220		95		(10	)		1,305		0		0		1,305
Other investments		558		0		0			558		0		1		557


Total	$	136,667	$	220	$	(1,257	)	$	135,630	$	11,946	$	121,822	$	1,862

(In millions)	Cost Basis		Unrealized Gains		Unrealized Losses			Recorded Basis		Cash and Cash Equivalents		Short-term Investments		Equity and Other Investments


June 30, 2017

Cash	$	3,624	$	0	$	0		$	3,624	$	3,624	$	0	$	0
Mutual funds		1,478		0		0			1,478		1,478		0		0
Commercial paper		319		0		0			319		69		250		0
Certificates of deposit		1,358		0		0			1,358		972		386		0
U.S. government and agency securities		112,119		85		(360	)		111,844		16		111,828		0
Foreign government bonds		5,276		2		(13	)		5,265		1,504		3,761		0
Mortgage- and asset-backed securities		3,921		14		(4	)		3,931		0		3,931		0
Corporate notes and bonds		4,786		61		(12	)		4,835		0		4,835		0
Municipal securities		284		43		0			327		0		327		0
Common and preferred stock		2,472		3,062		(34	)		5,500		0		0		5,500
Other investments		523		0		0			523		0		0		523


Total	$	136,160	$	3,267	$	(423	)	$	139,004	$	7,663	$	125,318	$	6,023

PART II

Item 8

As of June 30, 2018 and 2017, the recorded bases of common and preferred stock that are restricted for more than one year or are not publicly traded were $999 million and $1.1 billion, respectively. These investments are carried at cost and are reviewed quarterly for indicators of other-than-temporary impairment. It is not practicable for us to reliably estimate the fair value of these investments.

As of June 30, 2018 and 2017, collateral received under agreements for loaned securities was $1.8 billion and $3.7 billion, respectively, and primarily comprised U.S. government and agency securities.

Unrealized Losses on Investments

Investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows:

	Less than 12 Months					12 Months or Greater							Total Unrealized Losses

(In millions)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Total Fair Value


June 30, 2018

U.S. government and agency securities	$	82,352	$	(1,064	)	$	4,459	$	(103	)	$	86,811	$	(1,167	)
Foreign government bonds		3,457		(7	)		13		(3	)		3,470		(10	)
Mortgage- and asset-backed securities		2,072		(9	)		96		(4	)		2,168		(13	)
Corporate notes and bonds		3,111		(43	)		301		(13	)		3,412		(56	)
Municipal securities		45		(1	)		0		0			45		(1	)
Common and preferred stock		75		(6	)		8		(4	)		83		(10	)


Total	$	91,112	$	(1,130	)	$	4,877	$	(127	)	$	95,989	$	(1,257	)

	Less than 12 Months					12 Months or Greater							Total Unrealized Losses

(In millions)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Total Fair Value


June 30, 2017

U.S. government and agency securities	$	87,558	$	(348	)	$	371	$	(12	)	$	87,929	$	(360	)
Foreign government bonds		4,006		(2	)		23		(11	)		4,029		(13	)
Mortgage- and asset-backed securities		1,068		(3	)		198		(1	)		1,266		(4	)
Corporate notes and bonds		669		(8	)		177		(4	)		846		(12	)
Common and preferred stock		69		(6	)		148		(28	)		217		(34	)


Total	$	93,370	$	(367	)	$	917	$	(56	)	$	94,287	$	(423	)

Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Unrealized losses from domestic and international equities are due to market price movements. Management does not believe any remaining unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence.

Debt Investment Maturities

(In millions)	Cost Basis		Estimated Fair Value


June 30, 2018

Due in one year or less	$	31,590	$	31,451
Due after one year through five years		76,422		75,810
Due after five years through 10 years		21,765		21,396
Due after 10 years		924		922


Total	$	130,701	$	129,579

PART II

Item 8

NOTE 5 — DERIVATIVES

Our derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment. All notional amounts presented below are measured in U.S. dollar equivalents.

Foreign Currency

Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency hedge positions. Option and forward contracts are used to hedge a portion of forecasted international revenue for up to three years in the future and are designated as cash flow hedging instruments. Principal currencies hedged include the euro, Japanese yen, British pound, Canadian dollar, and Australian dollar. As of June 30, 2018 and 2017, the total notional amounts of these foreign exchange contracts sold were $6.1 billion and $8.9 billion, respectively.

Foreign currency risks related to certain non-U.S. dollar denominated securities are hedged using foreign exchange forward contracts that are designated as fair value hedging instruments. As of June 30, 2018 and 2017, the total notional amounts of these foreign exchange contracts sold were $5.0 billion and $5.1 billion, respectively.

Certain options and forwards not designated as hedging instruments are also used to manage the variability in foreign exchange rates on certain balance sheet amounts and to manage other foreign currency exposures. As of June 30, 2018, the total notional amounts of these foreign exchange contracts purchased and sold were $9.4 billion and $13.4 billion, respectively. As of June 30, 2017, the total notional amounts of these foreign exchange contracts purchased and sold were $8.8 billion and $10.6 billion, respectively.

Equity

Securities held in our equity and other investments portfolio are subject to market price risk. Market price risk is managed relative to broad-based global and domestic equity indices using certain convertible preferred investments, options, futures, and swap contracts not designated as hedging instruments. From time to time, to hedge our price risk, we may use and designate equity derivatives as hedging instruments, including puts, calls, swaps, and forwards. As of June 30, 2018, the total notional amounts of equity contracts purchased and sold for managing market price risk were $49 million and $5 million, respectively. As of June 30, 2017, the total notional amounts of equity contracts purchased and sold for managing market price risk were $1.9 billion and $2.4 billion, respectively, of which $1.6 billion and $1.8 billion, respectively, were designated as hedging instruments.

Interest Rate

Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of our fixed-income portfolio to achieve economic returns that correlate to certain broad-based fixed-income indices using exchange-traded option and futures contracts, and over-the-counter swap and option contracts, none of which are designated as hedging instruments. As of June 30, 2018, the total notional amounts of fixed-interest rate contracts purchased and sold were $306 million and $390 million, respectively. As of June 30, 2017, the total notional amounts of fixed-interest rate contracts purchased and sold were $233 million and $352 million, respectively.

In addition, we use “To Be Announced” forward purchase commitments of mortgage-backed assets to gain exposure to agency mortgage-backed securities. These meet the definition of a derivative instrument in cases where physical delivery of the assets is not taken at the earliest available delivery date. As of June 30, 2018 and 2017, the total notional derivative amounts of mortgage contracts purchased were $568 million and $567 million, respectively.

PART II

Item 8

Credit

Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit default swap contracts, not designated as hedging instruments, to manage credit exposures relative to broad-based indices and to facilitate portfolio diversification. We use credit default swaps as they are a low-cost method of managing exposure to individual credit risks or groups of credit risks. As of June 30, 2018, the total notional amounts of credit contracts purchased and sold were $4 million and $82 million, respectively. As of June 30, 2017, the total notional amounts of credit contracts purchased and sold were $267 million and $63 million, respectively.

Credit-Risk-Related Contingent Features

Certain of our counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the standard convention related to over-the-counter derivatives. As of June 30, 2018, our long-term unsecured debt rating was AAA, and cash investments were in excess of $1.0 billion. As a result, no collateral was required to be posted.

Fair Values of Derivative Instruments

The following table presents the fair values of derivative instruments designated as hedging instruments (“designated hedge derivatives”) and not designated as hedging instruments (“non-designated hedge derivatives”). The fair values exclude the impact of netting derivative assets and liabilities when a legally enforceable master netting agreement exists and fair value adjustments related to our own credit risk and counterparty credit risk:

		Assets															Liabilities


(In millions)	Short-term Investments			Other Current Assets				Equity and Other Investments			Other Long-term Assets				Other Current Liabilities				Other Long-term Liabilities


June 30, 2018

Non-designated Hedge Derivatives

Foreign exchange contracts	$	10			$	221			$	0		$	25			$	(193	)		$	(4	)
Equity contracts		2				0				0			0				(7	)			0
Interest rate contracts		11				0				0			0				(2	)			0
Credit contracts		0				0				0			0				(1	)			0


Total	$	23			$	221			$	0		$	25			$	(203	)		$	(4	)


Designated Hedge Derivatives

Foreign exchange contracts	$	95			$	174			$	0		$	0			$	0			$	0
Equity contracts		0				0				0			0				0				0


Total	$	95			$	174			$	0		$	0			$	0			$	0


Total gross amounts of derivatives	$	118			$	395			$	0		$	25			$	(203	)		$	(4	)


Gross derivatives either offset or subject to an enforceable master netting agreement	$	113			$	395			$	0		$	25			$	(203	)		$	(4	)
Gross amounts of derivatives offset on the balance sheet		(14	)			(135	)			0			(3	)			150				3


Net amounts presented on the balance sheet		99				260				0			22				(53	)			(1	)
Gross amounts of derivatives not offset on the balance sheet		0				0				0			0				0				0
Cash collateral received		0				0				0			0				(235	)			0


Net amount	$	99			$	260			$	0		$	22			$	(288	)		$	(1	)

PART II

Item 8

	Assets															Liabilities


(In millions)	Short-term Investments			Other Current Assets				Equity and Other Investments				Other Long-term Assets				Other Current Liabilities				Other Long-term Liabilities


June 30, 2017

Non-designated Hedge Derivatives

Foreign exchange contracts	$	9			$	203			$	0			$	6			$	(134	)		$	(8	)
Equity contracts		3				0				0				0				(6	)			0
Interest rate contracts		3				0				0				0				(7	)			0
Credit contracts		5				0				0				0				(1	)			0


Total	$	20			$	203			$	0			$	6			$	(148	)		$	(8	)


Designated Hedge Derivatives

Foreign exchange contracts	$	80			$	133			$	0			$	0			$	(3	)		$	0
Equity contracts		0				0				67				0				(186	)			0


Total	$	80			$	133			$	67			$	0			$	(189	)		$	0


Total gross amounts of derivatives	$	100			$	336			$	67			$	6			$	(337	)		$	(8	)


Gross derivatives either offset or subject to an enforceable master netting agreement	$	100			$	336			$	67			$	6			$	(334	)		$	(8	)
Gross amounts of derivatives offset on the balance sheet		(20	)			(132	)			(67	)			(8	)			221				7


Net amounts presented on the balance sheet		80				204				0				(2	)			(113	)			(1	)
Gross amounts of derivatives not offset on the balance sheet		0				0				0				0				0				0
Cash collateral received		0				0				0				0				(228	)			0


Net amount	$	80			$	204			$	0			$	(2	)		$	(341	)		$	(1	)

Refer to Note 4 – Investments and Note 6 – Fair Value Measurements for further information.

Fair Value Hedge Gains (Losses)

We recognized in other income (expense), net the following gains (losses) on contracts designated as fair value hedges and their related hedged items:

(In millions)


Year Ended June 30,	2018			2017			2016

Foreign Exchange Contracts

Derivatives	$	25		$	441		$	(797	)
Hedged items		78			(386	)		838


Total amount of ineffectiveness	$	103		$	55		$	41


Equity Contracts

Derivatives	$	(324	)	$	(74	)	$	(76	)
Hedged items		324			74			76


Total amount of ineffectiveness	$	0		$	0		$	0


Amount of equity contracts excluded from effectiveness assessment	$	80		$	(80	)	$	(10	)

PART II

Item 8

Cash Flow Hedge Gains (Losses)

We recognized the following gains (losses) on foreign exchange contracts designated as cash flow hedges:

(In millions)


Year Ended June 30,	2018			2017			2016

Effective Portion

Gains recognized in other comprehensive income (net of tax of $11, $4, and $24)	$	219		$	328		$	351
Gains reclassified from accumulated other comprehensive income (loss) into revenue		185			555			625

Amount Excluded from Effectiveness Assessment and Ineffective Portion

Losses recognized in other income (expense), net		(255	)		(389	)		(354	)

We estimate that $179 million of net derivative gains included in AOCI as of June 30, 2018 will be reclassified into earnings within the following 12 months. No significant amounts of gains (losses) were reclassified from AOCI into earnings as a result of forecasted transactions that failed to occur during fiscal year 2018.

Non-designated Derivative Gains (Losses)

Gains (losses) from changes in fair values of derivatives that are not designated as hedges are primarily recognized in other income (expense), net. These amounts are shown in the table below, with the exception of gains (losses) on derivatives presented in income statement line items other than other income (expense), net, which were immaterial for the periods presented.

(In millions)


Year Ended June 30,	2018			2017			2016

Foreign exchange contracts	$	(33	)	$	(117	)	$	(55	)
Equity contracts		(87	)		(114	)		(21	)
Interest rate contracts		(15	)		14			10
Credit contracts		(2	)		5			(1	)
Other contracts		0			(22	)		(87	)


Total	$	(137	)	$	(234	)	$	(154	)

PART II

Item 8

NOTE 6 — FAIR VALUE MEASUREMENTS

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the fair value of our financial instruments that are measured at fair value on a recurring basis:

(In millions)		Level 1		Level 2		Level 3		Gross Fair Value		Netting	^(a)		Net Fair Value


June 30, 2018

Assets

Mutual funds	$	246	$	0	$	0	$	246	$	0		$	246
Commercial paper		0		2,513		0		2,513		0			2,513
Certificates of deposit		0		2,058		0		2,058		0			2,058
U.S. government and agency securities		107,015		1,742		0		108,757		0			108,757
Foreign government bonds		22		5,054		0		5,076		0			5,076
Mortgage- and asset-backed securities		0		3,855		0		3,855		0			3,855
Corporate notes and bonds		0		6,894		15		6,909		0			6,909
Municipal securities		0		307		0		307		0			307
Common and preferred stock		287		0		18		305		0			305
Derivatives		1		535		2		538		(152	)		386


Total	$	107,571	$	22,958	$	35	$	130,564	$	(152	)	$	130,412


Liabilities

Derivatives and other	$	1	$	206	$	0	$	207	$	(153	)	$	54

(In millions)		Level 1		Level 2		Level 3		Gross Fair Value		Netting	^(a)		Net Fair Value


June 30, 2017

Assets

Mutual funds	$	1,478	$	0	$	0	$	1,478	$	0		$	1,478
Commercial paper		0		319		0		319		0			319
Certificates of deposit		0		1,358		0		1,358		0			1,358
U.S. government and agency securities		109,228		2,616		0		111,844		0			111,844
Foreign government bonds		0		5,187		0		5,187		0			5,187
Mortgage- and asset-backed securities		0		3,934		0		3,934		0			3,934
Corporate notes and bonds		0		4,829		1		4,830		0			4,830
Municipal securities		0		327		0		327		0			327
Common and preferred stock		2,414		1,994		18		4,426		0			4,426
Derivatives		1		508		0		509		(227	)		282


Total	$	113,121	$	21,072	$	19	$	134,212	$	(227	)	$	133,985


Liabilities

Derivatives and other	$	0	$	345	$	39	$	384	$	(228	)	$	156

(a)	These amounts represent the impact of netting derivative assets and derivative liabilities when a legally enforceable master netting agreement exists and fair value adjustments related to our own credit risk and counterparty credit risk.

The changes in our Level 3 financial instruments that are measured at fair value on a recurring basis were immaterial during the periods presented.

PART II

Item 8

The following table reconciles the total “Net Fair Value” of assets above to the balance sheet presentation of these same assets in Note 4 – Investments.

(In millions)


June 30,		2018			2017

Net fair value of assets measured at fair value on a recurring basis	$	130,412		$	133,985
Cash		3,942			3,624
Common and preferred stock measured at fair value on a nonrecurring basis		999			1,073
Other investments measured at fair value on a nonrecurring basis		557			523
Less derivative net assets classified as other current and long-term assets		(282	)		(202	)
Other		2			1


Recorded basis of investment components	$	135,630		$	139,004

Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

During fiscal year 2018 and 2017, we did not record any material other-than-temporary impairments on financial assets required to be measured at fair value on a nonrecurring basis.

NOTE 7 — INVENTORIES

The components of inventories were as follows:

(In millions)


June 30,	2018		2017

Raw materials	$	655	$	797
Work in process		54		145
Finished goods		1,953		1,239


Total	$	2,662	$	2,181

NOTE 8 — PROPERTY AND EQUIPMENT

The components of property and equipment were as follows:

(In millions)


June 30,	2018			2017

Land	$	1,254		$	1,107
Buildings and improvements		20,604			16,284
Leasehold improvements		4,735			5,064
Computer equipment and software		27,633			21,414
Furniture and equipment		4,457			4,044


Total, at cost		58,683			47,913
Accumulated depreciation		(29,223	)		(24,179	)


Total, net	$	29,460		$	23,734

During fiscal years 2018, 2017, and 2016, depreciation expense was $7.7 billion, $6.1 billion, and $4.9 billion, respectively. We have committed $1.9 billion for the construction of new buildings, building improvements, and leasehold improvements as of June 30, 2018.

PART II

Item 8

NOTE 9 — BUSINESS COMBINATIONS

LinkedIn Corporation

On December 8, 2016, we completed our acquisition of all issued and outstanding shares of LinkedIn Corporation, the world’s largest professional network on the Internet, for a total purchase price of $27.0 billion. The purchase price consisted primarily of cash of $26.9 billion. The acquisition is expected to accelerate the growth of LinkedIn, Office 365, and Dynamics 365. The financial results of LinkedIn have been included in our consolidated financial statements since the date of the acquisition.

The allocation of the purchase price to goodwill was completed as of June 30, 2017.

The major classes of assets and liabilities to which we allocated the purchase price were as follows:

(In millions)


Cash and cash equivalents	$	1,328
Short-term investments		2,110
Other current assets		697
Property and equipment		1,529
Intangible assets		7,887
Goodwill ⁽^a⁾		16,803
Short-term debt ^(b)		(1,323	)
Other current liabilities		(1,117	)
Deferred income taxes		(774	)
Other		(131	)


Total purchase price	$	27,009

(a)	Goodwill was assigned to our Productivity and Business Processes segment. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of LinkedIn. None of the goodwill is expected to be deductible for income tax purposes.

(b)

Following are the details of the purchase price allocated to the intangible assets acquired:

(In millions)	Amount		Weighted Average Life


Customer-related	$	3,607		7 years
Marketing-related (trade names)		2,148		20 years
Technology-based		2,109		3 years
Contract-based		23		5 years


Fair value of intangible assets acquired	$	7,887		9 years

Our consolidated income statements include the following revenue and operating loss attributable to LinkedIn since the date of acquisition:

(In millions)


Year Ended June 30,		2017

Revenue	$	2,271
Operating loss		(924	)

PART II

Item 8

Following are the supplemental consolidated financial results of Microsoft Corporation on an unaudited pro forma basis, as if the acquisition had been consummated on July 1, 2015:

(In millions, except earnings per share)


Year Ended June 30,		2017		2016

Revenue	$	98,291	$	94,490
Net income		25,179		19,128
Diluted earnings per share		3.21		2.38

GitHub Inc.

On June 4, 2018, we entered into a definitive agreement to acquire GitHub Inc. (“GitHub”) for $7.5 billion in an all-stock transaction. We expect the acquisition will close by the end of the calendar year, subject to approval by GitHub’s shareholders, satisfaction of certain regulatory approvals, and other customary closing conditions. GitHub will be included in our consolidated results of operations as of the date of acquisition.

Other

During fiscal year 2018, we completed nine acquisitions for total consideration of $948 million, substantially all of which was paid in cash. These entities have been included in our consolidated results of operations since their respective acquisition dates. Pro forma results of operations for these acquisitions have not been presented because the effects of these business combinations, individually and in aggregate, were not material to our consolidated results of operations.

NOTE 10 — GOODWILL

Changes in the carrying amount of goodwill were as follows:

(In millions)	June 30, 2016			Acquisitions				Other				June 30, 2017			Acquisitions			Other				June 30, 2018


Productivity and Business Processes		$	6,678		$	17,072	^(a)		$	(11	)		$	23,739		$	72		$	12			$	23,823
Intelligent Cloud			5,467			49				39				5,555			164			(16	)			5,703
More Personal Computing			5,727			115				(14	)			5,828			394			(65	)			6,157


Total		$	17,872		$	17,236			$	14			$	35,122		$	630		$	(69	)		$	35,683

(a)	Includes goodwill related to LinkedIn and other acquisitions. Refer to Note 9 – Business Combinations for further information.

Any change in the goodwill amounts resulting from foreign currency translations and purchase accounting adjustments are presented as “Other” in the above table. Also included in “Other” are business dispositions and transfers between segments due to reorganizations, as applicable.

As of June 30, 2018 and 2017, accumulated goodwill impairment was $11.3 billion.

PART II

Item 8

Goodwill Impairment

No instances of impairment were identified in our May 1, 2018, May 1, 2017, or May 1, 2016 tests.

NOTE 11 — INTANGIBLE ASSETS

The components of intangible assets, all of which are finite-lived, were as follows:

(In millions)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount


June 30,						2018							2017

Technology-based	$	7,220	$	(5,018	)	$	2,202	$	7,765	$	(4,318	)	$	3,447
Customer-related		4,031		(1,205	)		2,826		4,045		(692	)		3,353
Marketing-related		4,006		(1,071	)		2,935		4,016		(829	)		3,187
Contract-based		679		(589	)		90		841		(722	)		119


Total	$	15,936	$	(7,883	)	$	8,053	$	16,667	$	(6,561	)	$	10,106

No material impairments of intangible assets were identified during fiscal year 2018 or 2017.

During fiscal year 2016, we recorded impairment charges of $480 million related to intangible assets in the Devices reporting unit within our More Personal Computing segment. In the fourth quarter of fiscal year 2016, we tested these intangible assets for recoverability due to changes in facts and circumstances associated with the shift in strategic direction and reduced profitability expectations for our Phone business. Based on the results of our testing, we determined that the carrying value of the intangible assets was not recoverable, and an impairment charge was recorded to the extent that estimated fair value exceeded carrying value. We primarily used the income approach to determine the fair value of the intangible assets and determine the amount of impairment.

These intangible assets impairment charges were included in impairment and restructuring expenses in our consolidated income statement and reflected in Corporate and Other in our table of operating income (loss) by segment in Note 21 – Segment Information and Geographic Data.

We estimate that we have no significant residual value related to our intangible assets.

The components of intangible assets acquired during the periods presented were as follows:

(In millions)	Amount		Weighted Average Life		Amount		Weighted Average Life


Year Ended June 30,	2018				2017

Technology-based	$	178		4 years	$	2,265		2 years
Marketing-related		14		5 years		2,148		19 years
Contract-based		14		4 years		63		6 years
Customer-related		13		5 years		3,607		7 years


Total	$	219		5 years	$	8,083		9 years

Intangible assets amortization expense was $2.2 billion, $1.7 billion, and $978 million for fiscal years 2018, 2017, and 2016, respectively. Amortization of capitalized software was $54 million, $55 million, and $69 million for fiscal years 2018, 2017, and 2016, respectively.

PART II

Item 8

The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2018:

(In millions)


Year Ending June 30,

2019	$	1,785
2020		1,260
2021		1,043
2022		949
2023		806
Thereafter		2,210


Total	$	8,053

NOTE 12 — DEBT

Short-term Debt

As of June 30, 2018, we had no commercial paper issued and outstanding. As of June 30, 2017, we had $9.1 billion of commercial paper issued and outstanding, with a weighted average interest rate of 1.01% and maturities ranging from 25 days to 264 days. The estimated fair value of this commercial paper approximates its carrying value.

We have two $5.0 billion credit facilities that expire on October 30, 2018 and October 31, 2022, respectively. These credit facilities serve as a back-up for our commercial paper program. As of June 30, 2018, we were in compliance with the only financial covenant in both credit agreements, which requires us to maintain a coverage ratio of at least three times earnings before interest, taxes, depreciation, and amortization to interest expense, as defined in the credit agreements. No amounts were drawn against these credit facilities during any of the periods presented.

Long-term Debt

As of June 30, 2018, the total carrying value and estimated fair value of our long-term debt, including the current portion, were $76.2 billion and $77.5 billion, respectively. As of June 30, 2017, the total carrying value and estimated fair value of our long-term debt, including the current portion, were $77.1 billion and $80.3 billion, respectively. These estimated fair values are based on Level 2 inputs.

PART II

Item 8

The components of our long-term debt, including the current portion, and the associated interest rates were as follows:

(In millions, except interest rates)	Face Value June 30, 2018		Face Value June 30, 2017		Stated Interest Rate	Effective Interest Rate


Notes

November 15, 2017	$	0	$	600	0.875%	1.084%
May 1, 2018		0		450	1.000%	1.106%
November 3, 2018		1,750		1,750	1.300%	1.396%
December 6, 2018		1,250		1,250	1.625%	1.824%
June 1, 2019		1,000		1,000	4.200%	4.379%
August 8, 2019		2,500		2,500	1.100%	1.203%
November 1, 2019		18		18	0.500%	0.500%
February 6, 2020		1,500		1,500	1.850%	1.952%
February 12, 2020		1,500		1,500	1.850%	1.935%
October 1, 2020		1,000		1,000	3.000%	3.137%
November 3, 2020		2,250		2,250	2.000%	2.093%
February 8, 2021		500		500	4.000%	4.082%
August 8, 2021		2,750		2,750	1.550%	1.642%
December 6, 2021 ^(a)		2,044		1,996	2.125%	2.233%
February 6, 2022		1,750		1,750	2.400%	2.520%
February 12, 2022		1,500		1,500	2.375%	2.466%
November 3, 2022		1,000		1,000	2.650%	2.717%
November 15, 2022		750		750	2.125%	2.239%
May 1, 2023		1,000		1,000	2.375%	2.465%
August 8, 2023		1,500		1,500	2.000%	2.101%
December 15, 2023		1,500		1,500	3.625%	3.726%
February 6, 2024		2,250		2,250	2.875%	3.041%
February 12, 2025		2,250		2,250	2.700%	2.772%
November 3, 2025		3,000		3,000	3.125%	3.176%
August 8, 2026		4,000		4,000	2.400%	2.464%
February 6, 2027		4,000		4,000	3.300%	3.383%
December 6, 2028 ^(a)		2,044		1,996	3.125%	3.218%
May 2, 2033 ^(a)		642		627	2.625%	2.690%
February 12, 2035		1,500		1,500	3.500%	3.604%
November 3, 2035		1,000		1,000	4.200%	4.260%
August 8, 2036		2,250		2,250	3.450%	3.510%
February 6, 2037		2,500		2,500	4.100%	4.152%
June 1, 2039		750		750	5.200%	5.240%
October 1, 2040		1,000		1,000	4.500%	4.567%
February 8, 2041		1,000		1,000	5.300%	5.361%
November 15, 2042		900		900	3.500%	3.571%
May 1, 2043		500		500	3.750%	3.829%
December 15, 2043		500		500	4.875%	4.918%
February 12, 2045		1,750		1,750	3.750%	3.800%
November 3, 2045		3,000		3,000	4.450%	4.492%
August 8, 2046		4,500		4,500	3.700%	3.743%
February 6, 2047		3,000		3,000	4.250%	4.287%
February 12, 2055		2,250		2,250	4.000%	4.063%
November 3, 2055		1,000		1,000	4.750%	4.782%
August 8, 2056		2,250		2,250	3.950%	4.033%
February 6, 2057		2,000		2,000	4.500%	4.528%


Total	$	76,898	$	77,837

(a)	Euro-denominated debt securities.

PART II

Item 8

The notes in the table above are senior unsecured obligations and rank equally with our other senior unsecured debt outstanding. Interest on these notes is paid semi-annually, except for the euro-denominated debt securities on which interest is paid annually. Cash paid for interest on our debt for fiscal years 2018, 2017, and 2016 was $2.4 billion, $1.6 billion, and $1.1 billion, respectively. As of June 30, 2018 and 2017, the aggregate debt issuance costs and unamortized discount associated with our long-term debt, including the current portion, were $658 million and $715 million, respectively.

Maturities of our long-term debt for each of the next five years and thereafter are as follows:

(In millions)


Year Ending June 30,

2019	$	4,000
2020		5,518
2021		3,750
2022		8,044
2023		2,750
Thereafter		52,836


Total	$	76,898

NOTE 13 — INCOME TAXES

Recent Tax Legislation

On December 22, 2017, the TCJA was enacted into law, which significantly changes existing U.S. tax law and includes numerous provisions that affect our business, such as imposing a one-time transition tax on deemed repatriation of deferred foreign income, reducing the U.S. federal statutory tax rate, and adopting a territorial tax system. The TCJA required us to incur a one-time transition tax on deferred foreign income not previously subject to U.S. income tax at a rate of 15.5% for foreign cash and certain other net current assets, and 8% on the remaining income. The TCJA also reduced the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018. For fiscal year 2018, our blended U.S. federal statutory tax rate is 28.1%. This is the result of using the tax rate of 35% for the first and second quarter of fiscal year 2018 and the reduced tax rate of 21% for the third and fourth quarter of fiscal year 2018. The TCJA includes a provision to tax global intangible low-taxed income (“GILTI”) of foreign subsidiaries and a base erosion anti-abuse tax (“BEAT”) measure that taxes certain payments between a U.S. corporation and its foreign subsidiaries. The GILTI and BEAT provisions of the TCJA will be effective for us beginning July 1, 2018.

The TCJA was effective in the second quarter of fiscal year 2018. As of June 30, 2018, we have not completed our accounting for the estimated tax effects of the TCJA. During fiscal year 2018, we recorded a provisional net charge of $13.7 billion related to the TCJA based on reasonable estimates for those tax effects. Due to the timing of the enactment and the complexity in applying the provisions of the TCJA, the provisional net charge is subject to revisions as we continue to complete our analysis of the TCJA, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service (“IRS”), FASB, and other standard-setting and regulatory bodies. Adjustments may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made. Our accounting for the estimated tax effects of the TCJA will be completed during the measurement period, which is not expected to extend beyond one year from the enactment date. The impacts of our estimates are described further below.

During fiscal year 2018, we recorded an estimated net charge of $13.7 billion related to the TCJA, due to the impact of the one-time transition tax on the deemed repatriation of deferred foreign income of $17.9 billion, offset in part by the impact of changes in the tax rate of $4.2 billion, primarily on deferred tax assets and liabilities.

We recorded an estimated $17.9 billion charge in fiscal year 2018 related to the transition tax, which was included in the provision for income taxes in our consolidated income statements and income taxes in our consolidated balance sheets. We have not yet completed our accounting for the transition tax as our analysis of deferred foreign income is not complete. To calculate the transition tax, we estimated our deferred foreign income for fiscal year 2018 because these tax returns are not complete or due. Fiscal year 2018 taxable income will be known once the respective tax returns are completed and filed. In addition, U.S. and foreign audit settlements may significantly impact the estimated transition tax. The impact of the U.S. and foreign audits on the transition tax will be known as the audits are concluded.

PART II

Item 8

In addition, we recorded an estimated $4.2 billion benefit in fiscal year 2018 from the impact of changes in the tax rate, primarily on deferred tax assets and liabilities, which was included in provision for income taxes in our consolidated income statements and deferred income taxes and long-term income taxes in our consolidated balance sheets. We remeasured our deferred taxes to reflect the reduced rate that will apply when these deferred taxes are settled or realized in future periods.

The TCJA subjects a U.S. corporation to tax on its GILTI. Due to the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the TCJA and the application of GAAP. Under GAAP, we can make an accounting policy election to either treat taxes due on the GILTI inclusion as a current period expense or factor such amounts into our measurement of deferred taxes. We elected the deferred method, and the corresponding deferred tax assets and liabilities are included in the table of deferred income tax assets and liabilities below.

On August 1, 2018, the Internal Revenue Service published on its website proposed regulations relating to the transition tax imposed by the TCJA. Once published in the Federal Register, the proposed regulations are subject to a 60-day comment period. Final regulations are expected to be issued after consideration of comments. We are currently evaluating the impact of the proposed regulations.

Provision for Income Taxes

The components of the provision for income taxes were as follows:

(In millions)


Year Ended June 30,	2018			2017			2016

Current Taxes

U.S. federal	$	19,764		$	2,739		$	545
U.S. state and local		934			30			136
Foreign		4,348			2,472			1,940


Current taxes	$	25,046		$	5,241		$	2,621

Deferred Taxes

U.S. federal	$	(4,292	)	$	(554	)	$	1,919
U.S. state and local		(458	)		269			111
Foreign		(393	)		(544	)		449


Deferred taxes	$	(5,143	)	$	(829	)	$	2,479


Provision for income taxes	$	19,903		$	4,412		$	5,100

U.S. and foreign components of income before income taxes were as follows:

(In millions)


Year Ended June 30,	2018		2017		2016

U.S.	$	11,527	$	6,843	$	5,125
Foreign		24,947		23,058		20,514


Income before income taxes	$	36,474	$	29,901	$	25,639

PART II

Item 8

Effective Tax Rate

The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows:



Year Ended June 30,	2018		2017		2016

Federal statutory rate		28.1%		35.0%		35.0%
Effect of:
Foreign earnings taxed at lower rates		(7.8)%		(11.6)%		(14.5)%
Impacts of TCJA		37.7%		0%		0%
Phone business losses		0%		(5.7)%		1.0%
Excess tax benefits relating to stock-based compensation		(2.5)%		(2.1)%		(1.6)%
Interest, net		1.2%		1.4%		0.9%
Other reconciling items, net		(2.1)%		(2.2)%		(0.9)%


Effective rate		54.6%		14.8%		19.9%

The increase from the federal statutory rate in fiscal year 2018 is primarily due to the net charge related to the enactment of the TCJA in the second quarter of fiscal year 2018, offset in part by earnings taxed at lower rates in foreign jurisdictions. The decrease from the federal statutory rate in fiscal year 2017 and 2016 is primarily due to earnings taxed at lower rates in foreign jurisdictions. Our foreign regional operating centers in Ireland, Singapore and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated 87%, 76%, and 91% of our foreign income before tax in fiscal years 2018, 2017, and 2016, respectively. Other reconciling items, net consists primarily of tax credits, U.S. state income taxes, and domestic production activities deduction. In fiscal years 2018, 2017, and 2016, there were no individually significant other reconciling items.

The increase in our effective tax rate for fiscal year 2018 compared to fiscal year 2017 was primarily due to the net charge related to the enactment of the TCJA and the realization of tax benefits attributable to previous Phone business losses in fiscal year 2017. The decrease in our effective tax rate for fiscal year 2017 compared to fiscal year 2016 was primarily due to the realization of tax benefits attributable to previous Phone business losses, offset in part by changes in the mix of our income before income taxes between the U.S. and foreign countries.

PART II

Item 8

The components of the deferred income tax assets and liabilities were as follows:

(In millions)


June 30,	2018				2017

Deferred Income Tax Assets

Stock-based compensation expense	$		460		$		777
Accruals, reserves, and other expenses			1,832				1,859
Loss and credit carryforwards			3,369				4,809
Depreciation and amortization			351				53
Other			56				255


Deferred income tax assets			6,068				7,753
Less valuation allowance			(3,186	)			(3,310	)


Deferred income tax assets, net of valuation allowance	$		2,882		$		4,443


Deferred Income Tax Liabilities

Foreign earnings	$	0			$	(1,134		)
Unrealized gain on investments and debt		0				(1,384		)
Unearned revenue		(639		)		(5,760		)
Depreciation and amortization		(1,103		)		(1,630		)
Other		(312		)		(21		)


Deferred income tax liabilities	$	(2,054		)	$	(9,929		)


Net deferred income tax assets (liabilities)	$	828			$	(5,486		)


Reported As

Other long-term assets	$	1,369			$	248
Long-term deferred income tax liabilities		(541		)		(5,734		)


Net deferred income tax assets (liabilities)	$	828			$	(5,486		)

We recorded a deferred tax liability of $7.4 billion related to the recognition of revenue as part of the adoption of the new revenue standard.

As of June 30, 2018, we had federal, state and foreign net operating loss carryforwards of $257 million, $1.4 billion and $11.4 billion, respectively. The federal and state net operating loss carryforwards will expire in various years from fiscal 2019 through 2038, if not utilized. The majority of our foreign net operating loss carryforwards do not expire. Certain acquired net operating loss carryforwards are subject to an annual limitation, but are expected to be realized with the exception of those which have a valuation allowance.

The valuation allowance disclosed in the table above relates to the foreign net operating loss carryforwards and other net deferred tax assets that may not be realized.

Income taxes paid, net of refunds, were $5.5 billion, $2.4 billion, and $3.9 billion in fiscal years 2018, 2017, and 2016, respectively.

Uncertain Tax Positions

Unrecognized tax benefits as of June 30, 2018, 2017, and 2016, were $12.0 billion, $11.7 billion, and $10.2 billion, respectively, and were included in long-term income taxes in our consolidated balance sheets. If recognized, these tax benefits would affect our effective tax rates for fiscal years 2018, 2017, and 2016, by $11.3 billion, $10.2 billion, and $8.8 billion, respectively.

PART II

Item 8

As of June 30, 2018, 2017, and 2016, we had accrued interest expense related to uncertain tax positions of $3.0 billion, $2.3 billion, and $1.9 billion, respectively, net of income tax benefits. Interest expense on unrecognized tax benefits, net of tax effects, was $688 million, $399 million, and $163 million in fiscal years 2018, 2017, and 2016, respectively, and was included in provision for income taxes.

The aggregate changes in the balance of unrecognized tax benefits were as follows:

(In millions)


Year Ended June 30,	2018			2017			2016

Balance, beginning of year	$	11,737		$	10,164		$	9,599
Decreases related to settlements		(193	)		(4	)		(201	)
Increases for tax positions related to the current year		1,445			1,277			1,086
Increases for tax positions related to prior years		151			397			115
Decreases for tax positions related to prior years		(1,176	)		(49	)		(317	)
Decreases due to lapsed statutes of limitations		(3	)		(48	)		(118	)


Balance, end of year	$	11,961		$	11,737		$	10,164

While we settled a portion of the IRS audit for tax years 2004 to 2006 during the third quarter of fiscal year 2011, and a portion of the IRS audit for tax years 2007 to 2009 during the first quarter of fiscal year 2016, we remain under audit for those years. In the second quarter of fiscal year 2018, we settled a portion of the IRS audit for tax years 2010 to 2013. We continue to be subject to examination by the IRS for tax years 2010 to 2017. In February 2012, the IRS withdrew its 2011 Revenue Agents Report for tax years 2004 to 2006 and reopened the audit phase of the examination. As of June 30, 2018, the primary unresolved issue relates to transfer pricing, which could have a significant impact in our consolidated financial statements if not resolved favorably. We believe our allowances for income tax contingencies are adequate. We have not received a proposed assessment for the unresolved issues and do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months.

We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years 1996 to 2017, some of which are currently under audit by local tax authorities. The resolution of each of these audits is not expected to be material to our consolidated financial statements.

NOTE 14 — RESTRUCTURING CHARGES

2016 Restructuring

In the fourth quarter of fiscal year 2016, management approved restructuring plans that resulted in approximately 4,700 job eliminations in fiscal year 2017, primarily across our smartphone hardware business and global sales. In fiscal year 2016, we incurred restructuring charges of $501 million in connection with the 2016 restructuring plans, including severance expenses and other reorganization costs. The actions associated with these restructuring plans were completed as of June 30, 2017.

2017 Restructuring

PART II

Item 8

NOTE 15 — UNEARNED REVENUE

Unearned revenue by segment was as follows:

(In millions)


June 30,	2018		2017

Productivity and Business Processes	$	14,864	$	12,692
Intelligent Cloud		14,706		11,152
More Personal Computing		3,150		2,812


Total	$	32,720	$	26,656

The opening balance of unearned revenue was $22.2 billion as of July 1, 2016.

Changes in unearned revenue were as follows:

(In millions)


Year Ended June 30, 2018

Balance, beginning of period	$	26,656
Deferral of revenue		61,142
Recognition of unearned revenue		(55,078	)


Balance, end of period	$	32,720

Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized (“contracted not recognized revenue”), which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted not recognized revenue was $73 billion as of June 30, 2018, of which we expect to recognize approximately 60% of the revenue over the next 12 months and the remainder thereafter.

NOTE 16 — LEASES

The components of lease expense were as follows:

(In millions)


Year Ended June 30,	2018			2017		2016

Operating lease cost	$	1,585	$	1,412	$	936


Finance lease cost:
Amortization of right-of-use assets	$	243	$	104	$	28
Interest on lease liabilities		175		68		28


Total finance lease cost	$	418	$	172	$	56

PART II

Item 8

Supplemental cash flow information related to leases was as follows:

(In millions)


Year Ended June 30,	2018			2017		2016

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,522	$	1,157	$	936
Operating cash flows from finance leases		175		68		28
Financing cash flows from finance leases		144		46		6

Right-of-use assets obtained in exchange for lease obligations:
Operating leases		1,571		1,270		1,062
Finance leases		1,933		1,773		413

Supplemental balance sheet information related to leases was as follows:

(In millions, except lease term and discount rate)


June 30,	2018			2017

Operating Leases

Operating lease right-of-use assets	$	6,686		$	6,555


Other current liabilities	$	1,399		$	1,423
Operating lease liabilities		5,568			5,372


Total operating lease liabilities	$	6,967		$	6,795


Finance Leases

Property and equipment, gross	$	4,543		$	2,658
Accumulated depreciation		(404	)		(161	)


Property and equipment, net	$	4,139		$	2,497


Other current liabilities	$	176		$	113
Other long-term liabilities		4,125			2,425


Total finance lease liabilities	$	4,301		$	2,538

Weighted Average Remaining Lease Term

Operating leases		7 years			7 years
Finance leases		13 years			13 years

Weighted Average Discount Rate

Operating leases		2.7%			2.5%
Finance leases		5.2%			4.7%

Maturities of lease liabilities were as follows:

(In millions)


Year Ending June 30,	Operating Leases			Finance Leases

2019	$	1,492		$	386
2020		1,347			393
2021		1,086			401
2022		902			408
2023		721			410
Thereafter		2,157			4,036


Total lease payments		7,705			6,034
Less imputed interest		(738	)		(1,733	)


Total	$	6,967		$	4,301

PART II

Item 8

As of June 30, 2018, we have additional operating and finance leases, primarily for datacenters, that have not yet commenced of $594 million and $2.4 billion, respectively. These operating and finance leases will commence between fiscal year 2019 and fiscal year 2020 with lease terms of 1 year to 20 years.

NOTE 17 — CONTINGENCIES

Patent and Intellectual Property Claims

There were 34 patent infringement cases pending against Microsoft as of June 30, 2018, none of which are material individually or in aggregate.

Antitrust, Unfair Competition, and Overcharge Class Actions

The trial of the British Columbia action commenced in May 2016. Following a mediation, the parties agreed to a global settlement of all three Canadian actions, and have submitted the proposed settlement agreement to the courts in all three jurisdictions for approval. The courts will likely reach a decision on approval in September 2018.

Other Antitrust Litigation and Claims

China State Administration for Industry and Commerce Investigation

In 2014, Microsoft was informed that China’s State Agency for Market Regulation (“SAMR”) (formerly State Administration for Industry and Commerce) had begun a formal investigation relating to China’s Anti-Monopoly Law, and the SAMR conducted onsite inspections of Microsoft offices in Beijing, Shanghai, Guangzhou, and Chengdu. SAMR has stated the investigation relates to compatibility, bundle sales, file verification issues related to Windows and Office software, and potentially other issues.

Product-Related Litigation

U.S. Cell Phone Litigation

Microsoft Mobile Oy, a subsidiary of Microsoft, along with other handset manufacturers and network operators, is a defendant in 35 lawsuits filed in the Superior Court for the District of Columbia by individual plaintiffs who allege that radio emissions from cellular handsets caused their brain tumors and other adverse health effects. We assumed responsibility for these claims in our agreement to acquire Nokia’s Devices and Services business and have been substituted for the Nokia defendants. Nine of these cases were filed in 2002 and are consolidated for certain pre-trial proceedings; the remaining cases are stayed. In a separate 2009 decision, the Court of Appeals for the District of Columbia held that adverse health effect claims arising from the use of cellular handsets that operate within the U.S. Federal Communications Commission radio frequency emission guidelines (“FCC Guidelines”) are pre-empted by federal law. The plaintiffs allege that their handsets either operated outside the FCC Guidelines or were manufactured before the FCC Guidelines went into effect. The lawsuits also allege an industry-wide conspiracy to manipulate the science and testing around emission guidelines.

In 2013, the defendants in the consolidated cases moved to exclude the plaintiffs’ expert evidence of general causation on the basis of flawed scientific methodologies. In 2014, the trial court granted in part and denied in part the defendants’ motion to exclude the plaintiffs’ general causation experts. The defendants filed an interlocutory appeal challenging the standard for evaluating expert scientific evidence, which the District of Columbia Court of Appeals heard en banc. In October 2016, the Court of Appeals issued its decision adopting the standard advocated by the defendants and remanding the cases to the trial court for further proceedings under that standard. The plaintiffs have filed supplemental expert evidence, portions of which the defendants have moved to strike.

PART II

Item 8

Canadian Cell Phone Class Action

Microsoft Mobile Oy, along with other handset manufacturers and network operators, is a defendant in a 2013 class action lawsuit filed in the Supreme Court of British Columbia by a purported class of Canadians who have used cellular phones for at least 1,600 hours, including a subclass of users with brain tumors, alleging adverse health effects from cellular phone use. Microsoft was served with the complaint in June 2014 and has been substituted for the Nokia defendants. The litigation has been dormant for more than three years.

Employment-Related Litigation

Moussouris v. Microsoft

Current and former female Microsoft employees in certain engineering and information technology roles brought this class action in federal court in Seattle in 2015, alleging systemic gender discrimination in pay and promotions. The plaintiffs moved to certify the class in October 2017. Microsoft filed an opposition in January 2018, attaching an expert report showing no statistically significant disparity in pay and promotions between similarly situated men and women. In June 2018, the court denied the plaintiffs’ motion for class certification. The plaintiffs have appealed to the U.S. Court of Appeals for the Ninth Circuit. In July, the court denied Microsoft’s motion for summary judgment with respect to the named plaintiffs.

Other Contingencies

As of June 30, 2018, we accrued aggregate legal liabilities of $323 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $1.1 billion in aggregate beyond recorded amounts are reasonably possible. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact in our consolidated financial statements for the period in which the effects become reasonably estimable.

Indemnifications

We provide indemnifications of varying scope and size to certain customers against claims of intellectual property infringement made by third parties arising from the use of our products and certain other matters. Additionally, we have agreed to cover damages resulting from breaches of certain security and privacy commitments in our cloud business. In evaluating estimated losses on these obligations, we consider factors such as the degree of probability of an unfavorable outcome and our ability to make a reasonable estimate of the amount of loss. These obligations did not have a material impact in our consolidated financial statements during the periods presented.

NOTE 18 — STOCKHOLDERS’ EQUITY

Shares Outstanding

Shares of common stock outstanding were as follows:

(In millions)


Year Ended June 30,	2018			2017			2016

Balance, beginning of year		7,708			7,808			8,027
Issued		68			70			75
Repurchased		(99	)		(170	)		(294	)


Balance, end of year		7,677			7,708			7,808

PART II

Item 8

Share Repurchases

On September 16, 2013, our Board of Directors approved a share repurchase program authorizing up to $40.0 billion in share repurchases. This share repurchase program became effective on October 1, 2013, and was completed on December 22, 2016.

On September 20, 2016, our Board of Directors approved a share repurchase program authorizing up to an additional $40.0 billion in share repurchases. This share repurchase program commenced on December 22, 2016 following completion of the prior program approved on September 16, 2013, has no expiration date, and may be suspended or discontinued at any time without notice. As of June 30, 2018, $28.2 billion remained of this $40.0 billion share repurchase program.

We repurchased the following shares of common stock under the share repurchase programs:

(In millions)	Shares		Amount		Shares		Amount		Shares		Amount


Year Ended June 30,	2018				2017				2016

First Quarter		22	$	1,600		63	$	3,550		89	$	4,000
Second Quarter		22		1,800		59		3,533		66		3,600
Third Quarter		34		3,100		25		1,600		69		3,600
Fourth Quarter		21		2,100		23		1,600		70		3,600


Total		99	$	8,600		170	$	10,283		294	$	14,800

Shares repurchased beginning in the third quarter of fiscal year 2017 were under the share repurchase program approved September 20, 2016. All other shares repurchased were under the share repurchase program approved September 16, 2013. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards. All repurchases were made using cash resources.

Dividends

Our Board of Directors declared the following dividends:

Declaration Date

Dividend

Per Share

Record Date

Amount

Payment Date

Fiscal Year 2018

(in millions)

September 19, 2017

0.42

November 16, 2017

3,238

December 14, 2017

November 29, 2017

0.42

February 15, 2018

3,232

March 8, 2018

March 12, 2018

0.42

May 17, 2018

3,226

June 14, 2018

June 13, 2018

0.42

August 16, 2018

3,224

September 13, 2018

Fiscal Year 2017

September 20, 2016

0.39

November 17, 2016

3,024

December 8, 2016

November 30, 2016

0.39

February 16, 2017

3,012

March 9, 2017

March 14, 2017

0.39

May 18, 2017

3,009

June 8, 2017

June 13, 2017

0.39

August 17, 2017

3,003

September 14, 2017

The dividend declared on June 13, 2018 was included in other current liabilities as of June 30, 2018.

PART II

Item 8

NOTE 19 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes in accumulated other comprehensive income (loss) by component:

(In millions)


Year Ended June 30,	2018			2017			2016

Derivatives

Balance, beginning of period	$	134		$	352		$	590
Unrealized gains, net of tax of $11, $4, and $24		218			328			351
Reclassification adjustments for gains included in revenue		(185	)		(555	)		(625	)
Tax expense included in provision for income taxes		6			9			36


Amounts reclassified from accumulated other comprehensive income		(179	)		(546	)		(589	)


Net change related to derivatives, net of tax of $5, $(5), and $(12)		39			(218	)		(238	)


Balance, end of period	$	173		$	134		$	352


Investments

Balance, beginning of period	$	1,825		$	2,941		$	3,169
Unrealized gains (losses), net of tax of $(427), $267, and $120		(1,146	)		517			219
Reclassification adjustments for gains included in other income (expense), net		(2,309	)		(2,513	)		(688	)
Tax expense included in provision for income taxes		738			880			241


Amounts reclassified from accumulated other comprehensive income		(1,571	)		(1,633	)		(447	)


Net change related to investments, net of tax of $(1,165), $(613), and $(121)		(2,717	)		(1,116	)		(228	)


Balance, end of period	$	(892	)	$	1,825		$	2,941


Translation Adjustments and Other

Balance, beginning of period	$	(1,332	)	$	(1,499	)	$	(1,237	)
Translation adjustments and other, net of tax effects of $0, $9, and $(33)		(178	)		167			(262	)


Balance, end of period	$	(1,510	)	$	(1,332	)	$	(1,499	)

Cumulative effect of accounting change		42			0			0


Accumulated other comprehensive income (loss), end of period	$	(2,187	)	$	627		$	1,794

NOTE 20 — EMPLOYEE STOCK AND SAVINGS PLANS

We grant stock-based compensation to employees and directors. As of June 30, 2018, an aggregate of 381 million shares were authorized for future grant under our stock plans. In fiscal year 2018, our Board of Directors approved the 2017 Stock Plan, which authorized an additional 308 million shares for future grant under our stock plans. Awards that expire or are canceled without delivery of shares generally become available for issuance under the plans. We issue new shares of Microsoft common stock to satisfy vesting of awards granted under our stock plans. We also have an ESPP for all eligible employees.

Stock-based compensation expense and related income tax benefits were as follows:

(In millions)


Year Ended June 30,	2018		2017		2016

Stock-based compensation expense	$	3,940	$	3,266	$	2,668
Income tax benefits related to stock-based compensation		823		1,066		882

PART II

Item 8

Stock Plans

Stock awards entitle the holder to receive shares of Microsoft common stock as the award vests. Stock awards generally vest over a four or five-year service period.

Executive Incentive Plan

Activity for All Stock Plans

The fair value of stock awards was estimated on the date of grant using the following assumptions:



Year Ended June 30,	2018		2017		2016

Dividends per share (quarterly amounts)		$0.39 - $0.42		$0.36 - $0.39		$0.31 - $0.36
Interest rates		1.7% - 2.9%		1.2% - 2.2%		1.1% - 1.8%

During fiscal year 2018, the following activity occurred under our stock plans:

Shares			Weighted Average Grant-Date Fair Value


(In millions)

Stock Awards

Nonvested balance, beginning of year	201		$	46.32
Granted ^(a)	70			75.88
Vested	(80	)		45.74
Forfeited	(17	)		53.41


Nonvested balance, end of year	174			57.85

(a)	Includes 3 million, 2 million, and 1 million of PSUs granted at target and performance adjustments above target levels for fiscal years 2018, 2017, and 2016, respectively.

As of June 30, 2018, there was approximately $7.0 billion of total unrecognized compensation costs related to stock awards. These costs are expected to be recognized over a weighted average period of 3 years. The weighted average grant-date fair value of stock awards granted was $75.88, $55.64, and $41.51 for fiscal years 2018, 2017, and 2016, respectively. The fair value of stock awards vested was $6.6 billion, $4.8 billion, and $3.9 billion, for fiscal years 2018, 2017, and 2016, respectively.

Employee Stock Purchase Plan

(Shares in millions)


Year Ended June 30,	2018		2017		2016

Shares purchased		13		13		15
Average price per share	$	76.40	$	56.36	$	44.83

As of June 30, 2018, 116 million shares of our common stock were reserved for future issuance through the ESPP.

PART II

Item 8

Savings Plan

We have a savings plan in the U.S. that qualifies under Section 401(k) of the Internal Revenue Code, and a number of savings plans in international locations. Participating U.S. employees may contribute a portion of their salary, subject to certain limitations. We contribute fifty cents for each dollar a participant contributes in this plan, with a maximum employer contribution of 50% of the IRS contribution limit for the calendar year. Matching contributions for all plans were $807 million, $734 million, and $549 million in fiscal years 2018, 2017, and 2016, respectively, and were expensed as contributed.

NOTE 21 — SEGMENT INFORMATION AND GEOGRAPHIC DATA

Our reportable segments are described below.

Productivity and Business Processes

•

Office Commercial, including Office 365 subscriptions and Office licensed on-premises, comprising Office, Exchange, SharePoint, Skype for Business, and Microsoft Teams, and related Client Access Licenses (“CALs”).

•

Office Consumer, including Office 365 subscriptions and Office licensed on-premises, and Office Consumer Services, including Skype, Outlook.com, and OneDrive.

•

LinkedIn, including Talent Solutions, Marketing Solutions, and Premium Subscriptions.

•

Dynamics business solutions, including Dynamics ERP on-premises, Dynamics CRM on-premises, and Dynamics 365, a set of cloud-based applications across ERP and CRM.

Intelligent Cloud

Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business. This segment primarily comprises:

•

Server products and cloud services, including Microsoft SQL Server, Windows Server, Visual Studio, System Center, and related CALs, and Azure.

•

Enterprise Services, including Premier Support Services and Microsoft Consulting Services.

More Personal Computing

•

Devices, including Microsoft Surface, PC accessories, and other intelligent devices.

•

Gaming, including Xbox hardware and Xbox software and services, comprising Xbox Live transactions, subscriptions, and advertising (“Xbox Live”), video games, and third-party video game royalties.

•

Search.

PART II

Item 8

Segment revenue and operating income were as follows during the periods presented:

(In millions)


Year Ended June 30,		2018		2017			2016

Revenue

Productivity and Business Processes	$	35,865	$	29,870		$	25,792
Intelligent Cloud		32,219		27,407			24,952
More Personal Computing		42,276		39,294			40,410


Total	$	110,360	$	96,571		$	91,154


Operating Income (Loss)

Productivity and Business Processes	$	12,924	$	11,389		$	11,756
Intelligent Cloud		11,524		9,127			9,249
More Personal Computing		10,610		8,815			6,183
Corporate and Other		0		(306	)		(1,110	)


Total	$	35,058	$	29,025		$	26,078

Corporate and Other operating loss comprised impairment and restructuring expenses.

No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for the fiscal years 2018, 2017, or 2016. Revenue, classified by the major geographic areas in which our customers are located, was as follows:

(In millions)


Year Ended June 30,	2018		2017		2016

United States ^(a)	$	55,926	$	51,078	$	46,416
Other countries		54,434		45,493		44,738


Total	$	110,360	$	96,571	$	91,154

(a)	Includes billings to OEMs and certain multinational organizations because of the nature of these businesses and the impracticability of determining the geographic source of the revenue.

PART II

Item 8

Revenue from external customers, classified by significant product and service offerings, was as follows:

(In millions)


Year Ended June 30,	2018		2017		2016

Office products and cloud services	$	28,316	$	25,573	$	23,868
Server products and cloud services		26,129		21,649		19,062
Windows		19,518		18,593		17,548
Gaming		10,353		9,051		9,202
Search advertising		7,012		6,219		5,428
Enterprise Services		5,846		5,542		5,659
Devices		5,134		5,062		7,888
LinkedIn		5,259		2,271		0
Other		2,793		2,611		2,499


Total	$	110,360	$	96,571	$	91,154

Our commercial cloud revenue, which primarily comprises Office 365 commercial, Azure, Dynamics 365, and other cloud properties, was $23.2 billion, $14.9 billion, and $9.5 billion in fiscal years 2018, 2017, and 2016, respectively. These amounts are primarily included in Office products and services and server products and cloud services in the table above.

Assets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment; it is impracticable for us to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss.

(In millions)


June 30,	2018		2017		2016

United States	$	44,501	$	42,730	$	25,145
Ireland		12,843		12,889		2,099
Luxembourg		6,856		6,854		6,868
Other countries		15,682		13,044		11,047


Total	$	79,882	$	75,517	$	45,159

PART II

Item 8

NOTE 22 — QUARTERLY INFORMATION (UNAUDITED)

(In millions, except per share amounts)


Quarter Ended	September 30		December 31			March 31		June 30		Total

Fiscal Year 2018

Revenue	$	24,538	$	28,918		$	26,819	$	30,085	$	110,360
Gross margin		16,260		17,854			17,550		20,343		72,007
Operating income		7,708		8,679			8,292		10,379		35,058
Net income (loss) ^(a)		6,576		(6,302	)		7,424		8,873		16,571
Basic earnings (loss) per share		0.85		(0.82	)		0.96		1.15		2.15
Diluted earnings (loss) per share ^(b)		0.84		(0.82	)		0.95		1.14		2.13

Fiscal Year 2017 ^(c)

Revenue	$	21,928	$	25,826	$	23,212	$	25,605		$	96,571
Gross margin		14,084		15,925		15,152		17,149			62,310
Operating income		6,715		7,905		6,723		7,682	^(d)		29,025	^(d)
Net income		5,667		6,267		5,486		8,069	^(d)		25,489	^(d)
Basic earnings per share		0.73		0.81		0.71		1.05			3.29
Diluted earnings per share		0.72		0.80		0.70		1.03	^(d)		3.25	^(d)

(a)	Reflects the net charge (benefit) related to the TCJA of $13.8 billion for the second quarter, $(104) million for the fourth quarter, and $13.7 billion for fiscal year 2018.

(b)	Reflects the net charge (benefit) related to the TCJA, which decreased (increased) diluted EPS $1.78 for the second quarter, $(0.01) for the fourth quarter, and $1.75 for fiscal year 2018.

(c)	On December 8, 2016, we acquired LinkedIn Corporation. LinkedIn has been included in our consolidated results of operations starting on the acquisition date.

(d)	Includes $306 million of employee severance expenses primarily related to our sales and marketing restructuring plan, which decreased operating income, net income, and diluted EPS by $306 million, $243 million, and $0.04, respectively.

PART II

Item 8

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Microsoft Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the “Company”) as of June 30, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows, for each of the three years in the period ended June 30, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2018, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of June 30, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 3, 2018, expressed an unqualified opinion on the Company's internal control over financial reporting.

Change in Accounting Principles

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for revenue from contracts with customers and for accounting for leases in fiscal year 2018 due to the adoption of the new revenue standard and new lease standard, respectively. The Company adopted the new revenue standard using the full retrospective approach and adopted the new lease standard using a modified retrospective approach.

Basis for Opinion

/s/ DELOITTE & TOUCHE LLP

Seattle, Washington

August 3, 2018

We have served as the Company’s auditor since 1983.

PART II

Item 9, 9A